Mortgage to prepay or not prepay

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mortfree
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Re: Mortgage to prepay or not prepay

Post by mortfree » Sat Nov 09, 2019 5:01 am

*peace of mind

I am trying to limit myself to $2000 extra per year ($940/month is PI) towards the mortgage so basically two extra payments.

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 7:38 am

catlady wrote:
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.
Yup.

If you have the payoff money in your pocket, then there is no increase in flexibility by using up that payoff money to lower your monthly expenses. In fact, you lose flexibility. While the money is still in your pocket, you can decide to use it for whatever you think is best - including using it to pay off the mortgage somewhere down the line. That flexibility goes away once you use the money.

Remember that there's nothing inherently wrong with paying extra for piece of mind if that's what you prefer. Lots of people do the same.
Don't be a lemming.

smitcat
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Re: Mortgage to prepay or not prepay

Post by smitcat » Sat Nov 09, 2019 7:54 am

JoeRetire wrote:
Sat Nov 09, 2019 7:38 am
catlady wrote:
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.
Yup.

If you have the payoff money in your pocket, then there is no increase in flexibility by using up that payoff money to lower your monthly expenses. In fact, you lose flexibility. While the money is still in your pocket, you can decide to use it for whatever you think is best - including using it to pay off the mortgage somewhere down the line. That flexibility goes away once you use the money.

Remember that there's nothing inherently wrong with paying extra for piece of mind if that's what you prefer. Lots of people do the same.
"While the money is still in your pocket, you can decide to use it for whatever you think is best - including using it to pay off the mortgage somewhere down the line. That flexibility goes away once you use the money."
Exactly and a good way to think about it.
If you were to pay down a 30 yr $100K mortgage at 3% your cash flow increases by $421 mo.
That same $100K could be available to pay for anything else or to pay back that $421 mo for 20 yrs without any earnings being accrued (0%) - just as a comparison.
Could be many reasons why that $100 liquid may (may not) have future value including health costs, utilities, food, education , transportation etc.

"Remember that there's nothing inherently wrong with paying extra for piece of mind if that's what you prefer. Lots of people do the same."
Absolutely - very well said.

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 8:00 am

mortfree wrote:
Sat Nov 09, 2019 5:01 am
I am trying to limit myself to $2000 extra per year
Why this limit?
Don't be a lemming.

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corn18
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Re: Mortgage to prepay or not prepay

Post by corn18 » Sat Nov 09, 2019 8:12 am

JoeRetire wrote:
Sat Nov 09, 2019 7:38 am
catlady wrote:
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.
Yup.

If you have the payoff money in your pocket, then there is no increase in flexibility by using up that payoff money to lower your monthly expenses. In fact, you lose flexibility. While the money is still in your pocket, you can decide to use it for whatever you think is best - including using it to pay off the mortgage somewhere down the line. That flexibility goes away once you use the money.

Remember that there's nothing inherently wrong with paying extra for piece of mind if that's what you prefer. Lots of people do the same.
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth. This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
Don't do something, just stand there!

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 8:25 am

corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
Don't be a lemming.

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corn18
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Re: Mortgage to prepay or not prepay

Post by corn18 » Sat Nov 09, 2019 8:27 am

JoeRetire wrote:
Sat Nov 09, 2019 8:25 am
corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
And if the market drops 50% with that $500k in your mortgage instead of the market, you don't lose a dime.
Don't do something, just stand there!

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 8:32 am

corn18 wrote:
Sat Nov 09, 2019 8:27 am
JoeRetire wrote:
Sat Nov 09, 2019 8:25 am
corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
And if the market drops 50% with that $500k in your mortgage instead of the market, you don't lose a dime.
Yup. If you choose to completely deplete all of your holdings, you won't lose anything during a market drop. Of course if the market rises, you miss out on the gains.

Of course if you felt the market was going to drop 50%, why did you have anything in the market to begin with?
Don't be a lemming.

mortfree
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Re: Mortgage to prepay or not prepay

Post by mortfree » Sat Nov 09, 2019 8:35 am

JoeRetire wrote:
Sat Nov 09, 2019 8:00 am
mortfree wrote:
Sat Nov 09, 2019 5:01 am
I am trying to limit myself to $2000 extra per year
Why this limit?
I have about 60% equity in the house.

My net worth breakdown is mainly retirement savings and home equity (80% or so).

I want to build up the non-retirement/non-house part even more.

I am very close to having the funds to pay off the mortgage (180k) right now with non-retirement savings (170k) but that wouldn’t be a good idea.

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corn18
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Re: Mortgage to prepay or not prepay

Post by corn18 » Sat Nov 09, 2019 8:36 am

JoeRetire wrote:
Sat Nov 09, 2019 8:32 am
corn18 wrote:
Sat Nov 09, 2019 8:27 am
JoeRetire wrote:
Sat Nov 09, 2019 8:25 am
corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
And if the market drops 50% with that $500k in your mortgage instead of the market, you don't lose a dime.
Yup. If you choose to completely deplete all of your holdings, you won't lose anything during a market drop. Of course if the market rises, you miss out on the gains.

Of course if you felt the market was going to drop 50%, why did you have anything in the market to begin with?
I was just being contrary. As always, we set our strategy based on our risk tolerance.

For me right now, paying off the mortgage is a totally irrational objective. We were always "broke" because we couldn't figure out how to control our spending. Our NW in 2013 (age 48) was negative $200k. We had no hope of retiring or paying off a mortgage. Fixed the spending bit and now we have a shot at having $1M in savings and a paid off house. We currently have $1.5M in savings and a $500k mortgage. Based on emotion alone, I like the first way more than the latter. Lots more analysis required by professionals to sort that one out.
Don't do something, just stand there!

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 8:39 am

mortfree wrote:
Sat Nov 09, 2019 8:35 am
JoeRetire wrote:
Sat Nov 09, 2019 8:00 am
mortfree wrote:
Sat Nov 09, 2019 5:01 am
I am trying to limit myself to $2000 extra per year
Why this limit?
I have about 60% equity in the house.

My net worth breakdown is mainly retirement savings and home equity (80% or so).

I want to build up the non-retirement/non-house part even more.

I am very close to having the funds to pay off the mortgage (180k) right now with non-retirement savings (170k) but that wouldn’t be a good idea.
So why pay any extra at all?
Don't be a lemming.

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JoeRetire
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Sat Nov 09, 2019 8:42 am

corn18 wrote:
Sat Nov 09, 2019 8:36 am
JoeRetire wrote:
Sat Nov 09, 2019 8:32 am
corn18 wrote:
Sat Nov 09, 2019 8:27 am
JoeRetire wrote:
Sat Nov 09, 2019 8:25 am
corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
And if the market drops 50% with that $500k in your mortgage instead of the market, you don't lose a dime.
Yup. If you choose to completely deplete all of your holdings, you won't lose anything during a market drop. Of course if the market rises, you miss out on the gains.

Of course if you felt the market was going to drop 50%, why did you have anything in the market to begin with?
I was just being contrary. As always, we set our strategy based on our risk tolerance.
Okay.
For me right now, paying off the mortgage is a totally irrational objective. We were always "broke" because we couldn't figure out how to control our spending. Our NW in 2013 (age 48) was negative $200k. We had no hope of retiring or paying off a mortgage. Fixed the spending bit and now we have a shot at having $1M in savings and a paid off house. We currently have $1.5M in savings and a $500k mortgage. Based on emotion alone, I like the first way more than the latter. Lots more analysis required by professionals to sort that one out.
Got it. Sounds like good news all around.

Are you working with a professional financial adviser? A good experienced adviser can come up with "have you thought about..." scenarios for you. Once you can add the data and the math to the emotion, you'll be able to come up with a plan that works for you.

Sometimes the emotional path ends up being the best. Sometimes not.
Don't be a lemming.

Admiral
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Re: Mortgage to prepay or not prepay

Post by Admiral » Sat Nov 09, 2019 9:17 am

As usual the answer is "it depends": on your mortgage rate, amount of savings, goal (no mortgage at retirement), age, etc.

My opinion is paying off down any mortgage that's below 4% is silly. Taxable investing is a much better option for both flexibility and likely returns.

I also don't subscribe to the argument that you should not hold bonds that pay below your mortgage rate. Bonds are liquid, a mortgage is not. Bonds are (or can be) diversified. Your house is not. Bonds can be tapped in an emergency, your home equity cannot (if you have no job, for example).

Beyond all that, I see no reason to compare debt payoff to a fixed return instrument like bonds. Yes, I will concede that apples to apples, paying down a fixed debt is best compared to something with a fixed return. However, I believe a mortgage rate should be compared to total portfolio return, not bond return.

Why do I think this? The answer is risk. Once you choose an asset allocation that reflects your willingness and need to take risk, you've basically accepted the possibility that you may lose money on a daily, monthly, or yearly basis, but that overall you will end up ahead, long term. If you're comfortable with this risk profile--that is, you assume you will ultimately average out to some rate of return--THAT is what you should be comparing to your mortgage rate. Yes, that means that unlike a paydown strategy (where you are guaranteed to reduce the interest that you pay) at some points you will be losing money. But... so what? You already knew that when you chose to invest. The point is to choose what is more likely to come out ahead. There are very few (if any) 30 year periods where a 70/30 portfolio did not average more than a sub-4% return.

Now, all that said, I do think that there are edge cases where paying down a low rate makes sense, even a very low rate. First, if one is near retirement, one may want to reduce their market risk while also eliminating debt, which can also reduce sequence of returns risk. Second, if one has plenty of money or guaranteed income such that no market risk is necessary, then a paydown can make sense.

Beyond that, I would not pay off a fixed home loan that's below 4%. I'd rather have the cash on hand and the low-rate mortgage.

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Re: Mortgage to prepay or not prepay

Post by Valuethinker » Sat Nov 09, 2019 9:25 am

monkey_business wrote:
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.
The latter is key. Turning a monthly cash cost into a literal zero.

When you are 30 years to retirement there is a case for a larger portfolio and bigger mortgage. There is time for equity returns to catch up from a bear market.

5 to 10 years to go? Too short a time horizon.

smitcat
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Re: Mortgage to prepay or not prepay

Post by smitcat » Sat Nov 09, 2019 9:42 am

corn18 wrote:
Sat Nov 09, 2019 8:27 am
JoeRetire wrote:
Sat Nov 09, 2019 8:25 am
corn18 wrote:
Sat Nov 09, 2019 8:12 am
That makes sense from a dollars standpoint, but if you look at net worth, I would be worth a lot more over the next 2 years if I paid off my mortgage. I transfer $500k from taxable to the mortgage. The $44k in interest I would have paid minus any interest I would have earned on the $571k is a huge adder to net worth.
Huge adder? LOL! Doesn't that depend on how much you would have earned on the $500k?
This is comparing bonds to mortgage. If that $571k has the chance to earn 20% in equities, then that is a different story.
If your "taxable" holds only bonds, I'd ask why. And why 20% ?
And if the market drops 50% with that $500k in your mortgage instead of the market, you don't lose a dime.

There is a spectrum of choices...
- You could not pay the mortgage and keep it invested
- You could pay the mortgage and have lower cash flow
- You could sell the home and live on less and bank the equity

Will the market drop or rise? Will home prices drop or rise? How much is liquidity and safety worth to you?
I am not nearly smart enough to predict the future so I utilize past information as best I can to make a plan that suits our goals.
YMMV

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grabiner
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Re: Mortgage to prepay or not prepay

Post by grabiner » Sun Nov 10, 2019 10:07 am

Admiral wrote:
Sat Nov 09, 2019 9:17 am
As usual the answer is "it depends": on your mortgage rate, amount of savings, goal (no mortgage at retirement), age, etc.

My opinion is paying off down any mortgage that's below 4% is silly. Taxable investing is a much better option for both flexibility and likely returns.

I also don't subscribe to the argument that you should not hold bonds that pay below your mortgage rate. Bonds are liquid, a mortgage is not. Bonds are (or can be) diversified. Your house is not. Bonds can be tapped in an emergency, your home equity cannot (if you have no job, for example).
I agree with all of this except the diversification. Your house is equally undiversified whether it has a mortgage or not; if home prices drop by 20%, your net worth declines by 20% of your home value, not 20% of your equity. The fixed-income return from paying down your mortgage is not diversified, but it doesn't need to be, because it is risk-free.

And I have one more argument, which is the reason I didn't pay off my own mortgage for a marginal gain (when rates were a bit lower in September): not paying off now retains the option of paying off later. If you hold bonds and a mortgage and rates fall, your bond prices will rise and you can then sell bonds to pay down the mortgage for a bigger gain, or refinance your mortgage. If rates rise, you can keep the bonds and use them to make the mortgage payments over time rather than selling for a loss or refinancing at a higher rate.
Beyond all that, I see no reason to compare debt payoff to a fixed return instrument like bonds. Yes, I will concede that apples to apples, paying down a fixed debt is best compared to something with a fixed return. However, I believe a mortgage rate should be compared to total portfolio return, not bond return.

Why do I think this? The answer is risk. Once you choose an asset allocation that reflects your willingness and need to take risk, you've basically accepted the possibility that you may lose money on a daily, monthly, or yearly basis, but that overall you will end up ahead, long term. If you're comfortable with this risk profile--that is, you assume you will ultimately average out to some rate of return--THAT is what you should be comparing to your mortgage rate.
While I understand this logic, an objective view of risk should be in dollars, not in percentage of your invested portfolio. My usual comparison is the following four situations, all of equal net worth ($200K plus the value of your home).

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
Wiki David Grabiner

WildBill
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Re: Mortgage to prepay or not prepay

Post by WildBill » Sun Nov 10, 2019 10:25 am

Howdy

Assumed/Prospective investment growth and future asset values are contingent. Mortgage payment is not.

Mortgage prepayment is a guaranteed return. Assumed asset growth is not.

And I hate debt, so I don’t have any.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

Admiral
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Re: Mortgage to prepay or not prepay

Post by Admiral » Sun Nov 10, 2019 11:29 am

grabiner wrote:
Sun Nov 10, 2019 10:07 am
Admiral wrote:
Sat Nov 09, 2019 9:17 am
As usual the answer is "it depends": on your mortgage rate, amount of savings, goal (no mortgage at retirement), age, etc.

My opinion is paying off down any mortgage that's below 4% is silly. Taxable investing is a much better option for both flexibility and likely returns.

I also don't subscribe to the argument that you should not hold bonds that pay below your mortgage rate. Bonds are liquid, a mortgage is not. Bonds are (or can be) diversified. Your house is not. Bonds can be tapped in an emergency, your home equity cannot (if you have no job, for example).
I agree with all of this except the diversification. Your house is equally undiversified whether it has a mortgage or not; if home prices drop by 20%, your net worth declines by 20% of your home value, not 20% of your equity. The fixed-income return from paying down your mortgage is not diversified, but it doesn't need to be, because it is risk-free.

And I have one more argument, which is the reason I didn't pay off my own mortgage for a marginal gain (when rates were a bit lower in September): not paying off now retains the option of paying off later. If you hold bonds and a mortgage and rates fall, your bond prices will rise and you can then sell bonds to pay down the mortgage for a bigger gain, or refinance your mortgage. If rates rise, you can keep the bonds and use them to make the mortgage payments over time rather than selling for a loss or refinancing at a higher rate.
Beyond all that, I see no reason to compare debt payoff to a fixed return instrument like bonds. Yes, I will concede that apples to apples, paying down a fixed debt is best compared to something with a fixed return. However, I believe a mortgage rate should be compared to total portfolio return, not bond return.

Why do I think this? The answer is risk. Once you choose an asset allocation that reflects your willingness and need to take risk, you've basically accepted the possibility that you may lose money on a daily, monthly, or yearly basis, but that overall you will end up ahead, long term. If you're comfortable with this risk profile--that is, you assume you will ultimately average out to some rate of return--THAT is what you should be comparing to your mortgage rate.
While I understand this logic, an objective view of risk should be in dollars, not in percentage of your invested portfolio. My usual comparison is the following four situations, all of equal net worth ($200K plus the value of your home).

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
Net worth does not interest me in the least. If the value of my house drops 20% on paper, that makes zero difference in my life: whether I have a mortgage or not, as you note. If my investible assets fall 20%...well, I am accumulating so that also makes no difference to me. That said, I then have the option to sell high and buy low, if I want. That optionality is more limited if I've been using my investible monies to pay down my mortgage. Surely you agree with that?

In addition, money is worth more now than in the future. Pre-paying does nothing for me except free me of an obligation in the future, when my dollars are devalued. I'd rather keep my current dollars invested and working for me by compounding, so I have more dollars in the future. Some are in bonds, most are in stocks. Yes, I may still have a mortgage payment when I otherwise would not. But its overall percent of my budget will have fallen precipitously. In fact, it already has. $2,000 invested today is worth more than $2000 invested in 12 years.

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grabiner
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Re: Mortgage to prepay or not prepay

Post by grabiner » Sun Nov 10, 2019 6:06 pm

Admiral wrote:
Sun Nov 10, 2019 11:29 am
Net worth does not interest me in the least. If the value of my house drops 20% on paper, that makes zero difference in my life: whether I have a mortgage or not, as you note. If my investible assets fall 20%...well, I am accumulating so that also makes no difference to me. That said, I then have the option to sell high and buy low, if I want. That optionality is more limited if I've been using my investible monies to pay down my mortgage. Surely you agree with that?
I agree with you that it doesn't really hurt you if your house declines in value, since it continues to provide you with a place to live. But for your investments, the change in net worth is relevant. If your investments lose $48K in value, then you will have less money to spend in retirement, according to what you could have earned on $48K. Paying down your mortgage while keeping the same amount in stock doesn't affect what you could have earned on $48K, unless your preferred allocation after losing the $48K exceeds 100% stock.

The way I view this particular issue is not common, but it makes economic sense. I have a net bond allocation, currently 10% of my portfolio. If my stock investments lose $100K, I will sell $10K in bonds to buy more stock to restore the same allocation. If my stock investments then gain $100K, I will sell $10K in stock to buy bonds. If I choose to pay off my mortgage between the loss and the gain, I will pay it off by selling bonds (actually by selling my taxable stocks for a capital loss and moving bonds to stock in my employer plan), so I will still gain $100K if the stock market recovers.
In addition, money is worth more now than in the future. Pre-paying does nothing for me except free me of an obligation in the future, when my dollars are devalued. I'd rather keep my current dollars invested and working for me by compounding, so I have more dollars in the future. Some are in bonds, most are in stocks. Yes, I may still have a mortgage payment when I otherwise would not. But its overall percent of my budget will have fallen precipitously. In fact, it already has. $2,000 invested today is worth more than $2000 invested in 12 years.
And you get the benefit of compounding whether you pay down your mortgage or invest. This is exactly what makes a mortgage prepayment comparable to a bond. If you have a diversified bond portfolio, you probably hold some 12-year bonds worth $2000 (or something similar); if those bonds yield 3% after tax, you will have $2852 when the bonds mature. If you use that $2000 to pay down your 12-year mortgage at 4% after tax instead, you will have $3202 when the mortgage is paid off. You have to decide whether that difference in returns is worth the other advantages of having the bond (liquidity and optionality).
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Re: Mortgage to prepay or not prepay

Post by Skiwagon2 » Sun Nov 10, 2019 6:25 pm

Plan to retire in 3 years. Paying off mortgage within the next 12 months. Maxed out all tax advantaged accounts and want to live for a few years on my planned retirement budget to make sure I have planned correctly. Have a 2.85 10 year mortgage with 5 years remaining.

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Re: Mortgage to prepay or not prepay

Post by Admiral » Sun Nov 10, 2019 7:30 pm

grabiner wrote:
Sun Nov 10, 2019 6:06 pm
Admiral wrote:
Sun Nov 10, 2019 11:29 am
Net worth does not interest me in the least. If the value of my house drops 20% on paper, that makes zero difference in my life: whether I have a mortgage or not, as you note. If my investible assets fall 20%...well, I am accumulating so that also makes no difference to me. That said, I then have the option to sell high and buy low, if I want. That optionality is more limited if I've been using my investible monies to pay down my mortgage. Surely you agree with that?
I agree with you that it doesn't really hurt you if your house declines in value, since it continues to provide you with a place to live. But for your investments, the change in net worth is relevant. If your investments lose $48K in value, then you will have less money to spend in retirement, according to what you could have earned on $48K. Paying down your mortgage while keeping the same amount in stock doesn't affect what you could have earned on $48K, unless your preferred allocation after losing the $48K exceeds 100% stock.

The way I view this particular issue is not common, but it makes economic sense. I have a net bond allocation, currently 10% of my portfolio. If my stock investments lose $100K, I will sell $10K in bonds to buy more stock to restore the same allocation. If my stock investments then gain $100K, I will sell $10K in stock to buy bonds. If I choose to pay off my mortgage between the loss and the gain, I will pay it off by selling bonds (actually by selling my taxable stocks for a capital loss and moving bonds to stock in my employer plan), so I will still gain $100K if the stock market recovers.
In addition, money is worth more now than in the future. Pre-paying does nothing for me except free me of an obligation in the future, when my dollars are devalued. I'd rather keep my current dollars invested and working for me by compounding, so I have more dollars in the future. Some are in bonds, most are in stocks. Yes, I may still have a mortgage payment when I otherwise would not. But its overall percent of my budget will have fallen precipitously. In fact, it already has. $2,000 invested today is worth more than $2000 invested in 12 years.
And you get the benefit of compounding whether you pay down your mortgage or invest. This is exactly what makes a mortgage prepayment comparable to a bond. If you have a diversified bond portfolio, you probably hold some 12-year bonds worth $2000 (or something similar); if those bonds yield 3% after tax, you will have $2852 when the bonds mature. If you use that $2000 to pay down your 12-year mortgage at 4% after tax instead, you will have $3202 when the mortgage is paid off. You have to decide whether that difference in returns is worth the other advantages of having the bond (liquidity and optionality).
Except my mortgage is 2.25% and lifetime TBM average yield is 4.26% (granted it's much less at the moment). Remember that we're making a bet that the TOTAL portfolio outperforms the mortgage, not simply the bond portion.

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Re: Mortgage to prepay or not prepay

Post by Rowan Oak » Sun Nov 10, 2019 8:14 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.
This was my approach. Maybe not exactly half, but each month money went to paying off the mortgage and my taxable brokerage account. Worked fine and no regrets either way.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Mortgage to prepay or not prepay

Post by EnjoyIt » Sun Nov 10, 2019 9:41 pm

grabiner wrote:
Sun Nov 10, 2019 10:07 am

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
This right here is the problem with your argument. We have had this discussion before. A and B are equivalent when one's life is a corporate balance sheet. Humans which I would assume most of us are, do not function like a spreadsheets. Your example A and B are mathematically the same, but ohh so different. "A" has an asset allocation of 60/40 while "B" is far riskier with an asset allocation of 80/20 even though their net worth is exactly the same. If a 50% equities drawdown recession hits, portfolio "A" will be down 30% while portfolio "B" will be down 40%. Both will still have the same mortgage payment but portfolio "A" has more cash on hand to weather the storm as it passes through. Sure one may be able to take equity out of their home, but the key word is "may" as that option is not guaranteed. Portfolio B is a far riskier position. just like in the example below, Portfolio E is is a far better position when there is a 50% drawdown.

Portfolio E: $240k equities, $160k bonds, $400k mortgage.
Portfolio F: $240k equities $0 bonds, $240k mortgage.

Markets collapse 50%, you lose your job, home value is down 25%. Portfolio E is in much better position.

On the other extreme, a $3 million portfolio with a $200k mortgage, assuming it as a negative bond is very appropriate way of thinking.

TO add a another point, there is a reason why target date funds do not use your mortgage value in determining AA, or why financial advisors do not adjust or recommend adjusting your asset allocation with every mortgage payment. It is because a mortgage is not 100% antonym to a bond. They are very similar, they negate each other on a balance sheet, but they are not exact opposites and I believe thinking and pushing the idea that they are exact opposites is a mistake.

Maybe for some, life fits very nicely on a corporate balance sheet and they adjust their AA monthly with every mortgage payment, but I can assure you that the majority of us do not act this way.

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Re: Mortgage to prepay or not prepay

Post by grabiner » Sun Nov 10, 2019 10:03 pm

EnjoyIt wrote:
Sun Nov 10, 2019 9:41 pm
grabiner wrote:
Sun Nov 10, 2019 10:07 am

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
This right here is the problem with your argument. We have had this discussion before. A and B are equivalent when one's life is a corporate balance sheet. Humans which I would assume most of us are, do not function like a spreadsheets. Your example A and B are mathematically the same, but ohh so different. "A" has an asset allocation of 60/40 while "B" is far riskier with an asset allocation of 80/20 even though their net worth is exactly the same. If a 50% equities drawdown recession hits, portfolio "A" will be down 30% while portfolio "B" will be down 40%. Both will still have the same mortgage payment but portfolio "A" has more cash on hand to weather the storm as it passes through.
And I agree with this, which is why I mentioned liquidity as a reason you might prefer portfolio B to A even if mortgage rates are higher than bond yields. (The emotional argument usually goes the other way, though; many people would rather get rid of debt even if it is not financially optimal.)

But my point is not whether A or B is better, but that it is easier to compare D to C, and B to A (which is the same relationship), when deciding between A and D. If you prefer D to C, and B to A, then you should pay down your mortgage somehow; you can choose to change your percentage allocation or your dollar allocation to stock. If you prefer C to D, and A to B, then you should not pay down your mortgage.
Maybe for some, life fits very nicely on a corporate balance sheet and they adjust their AA monthly with every mortgage payment, but I can assure you that the majority of us do not act this way.
Not monthly for me, because I only rebalance annually, but this is exactly how I do it. My asset allocation spreadsheet has a line "Developed Markets Index: 80% large-cap developed, 20% small-cap developed", and it likewise has a line "Mortgage: -100% bond". When I do my annual rebalance, I update my mortgage balance along with my fund balances, and then decide how much to hold in bonds. If I pay off my mortgage, I will sell international stocks (since that is what I have in my taxable account with the lowest capital gain), and then, since that puts my allocation out of balance, I will sell bonds in my employer plan and buy an equal amount of international stocks.
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Re: Mortgage to prepay or not prepay

Post by EnjoyIt » Mon Nov 11, 2019 9:41 am

grabiner wrote:
Sun Nov 10, 2019 10:03 pm
EnjoyIt wrote:
Sun Nov 10, 2019 9:41 pm
grabiner wrote:
Sun Nov 10, 2019 10:07 am

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
This right here is the problem with your argument. We have had this discussion before. A and B are equivalent when one's life is a corporate balance sheet. Humans which I would assume most of us are, do not function like a spreadsheets. Your example A and B are mathematically the same, but ohh so different. "A" has an asset allocation of 60/40 while "B" is far riskier with an asset allocation of 80/20 even though their net worth is exactly the same. If a 50% equities drawdown recession hits, portfolio "A" will be down 30% while portfolio "B" will be down 40%. Both will still have the same mortgage payment but portfolio "A" has more cash on hand to weather the storm as it passes through.
And I agree with this, which is why I mentioned liquidity as a reason you might prefer portfolio B to A even if mortgage rates are higher than bond yields. (The emotional argument usually goes the other way, though; many people would rather get rid of debt even if it is not financially optimal.)

But my point is not whether A or B is better, but that it is easier to compare D to C, and B to A (which is the same relationship), when deciding between A and D. If you prefer D to C, and B to A, then you should pay down your mortgage somehow; you can choose to change your percentage allocation or your dollar allocation to stock. If you prefer C to D, and A to B, then you should not pay down your mortgage.
Maybe for some, life fits very nicely on a corporate balance sheet and they adjust their AA monthly with every mortgage payment, but I can assure you that the majority of us do not act this way.
Not monthly for me, because I only rebalance annually, but this is exactly how I do it. My asset allocation spreadsheet has a line "Developed Markets Index: 80% large-cap developed, 20% small-cap developed", and it likewise has a line "Mortgage: -100% bond". When I do my annual rebalance, I update my mortgage balance along with my fund balances, and then decide how much to hold in bonds. If I pay off my mortgage, I will sell international stocks (since that is what I have in my taxable account with the lowest capital gain), and then, since that puts my allocation out of balance, I will sell bonds in my employer plan and buy an equal amount of international stocks.
Although you rebalance yearly based on your mortgage, most people do not follow that practice. Most financial advisors do not recommend the same as well. Although I have no definitive proof, I suspect Vanguard PSA does not follow your pathway either. Generally the recommendation is Age in bonds not (Age plus mortgage value) in bonds. Some do (Age minus 10) or (Age minus 20) in bonds, but again, mortgage is not in the formula.

If one has an AA that they are comfortable with, can sleep at night with, mitigates their risk, adding in the mortgage not only increases complexity, it decreases that investors expected return because it lowers risk unnecessarily.
If I am an early investor in my 30s who sleeps well at night with a 70/30 portfolio, why would I want to adjust it to 30/70 because I also have a mortgage? Again, yes, strictly by math you are 100% correct. But again, we are human beings and not a corporate balance sheet. We create an AA based on our willingness and need to take risk. An early investor should not be sitting on a 30/70 portfolio because they took the incorrect advise of considering their mortgage a negative bond. Even worse, an early investor should not be sitting on 0/100 portfolio because they hold a mortgage and an early investor should not be paying down a low interest rate mortgage when they have no wealth at all, especially if they are forgoing tax deferred space and matching in an effort to create an AA of (Age minus 10) in bonds and hold a mortgage.

I reiterate that a mortgage is not a negative bond and we need to stop spreading this misinformation.

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Re: Mortgage to prepay or not prepay

Post by Admiral » Mon Nov 11, 2019 9:52 am

EnjoyIt wrote:
Mon Nov 11, 2019 9:41 am
grabiner wrote:
Sun Nov 10, 2019 10:03 pm
EnjoyIt wrote:
Sun Nov 10, 2019 9:41 pm
grabiner wrote:
Sun Nov 10, 2019 10:07 am

A: $240K in stock, $160K in bonds, $200K mortgage
B: $240K in stock, $60K in bonds, $100K mortgage
C: $180K in stock, $220K in bonds, $200K mortgage
D: $180K in stock, $120K in bonds, $100K mortgage

You are trying to compare A to D. However, it is A and B which are comparable in risk; if the stock market drops 20%, your net worth will drop by $48K in either situation. Likewise, C and D have comparable risk. Thus, if you prefer D to C, and equivalently B to A, you shouldn't do either A or C. You might choose either B or D.

Whether you prefer B to A, or D to C, is not just a matter of interest rates; liquidity, optionality, and the risk of whatever bonds you choose are also relevant.
This right here is the problem with your argument. We have had this discussion before. A and B are equivalent when one's life is a corporate balance sheet. Humans which I would assume most of us are, do not function like a spreadsheets. Your example A and B are mathematically the same, but ohh so different. "A" has an asset allocation of 60/40 while "B" is far riskier with an asset allocation of 80/20 even though their net worth is exactly the same. If a 50% equities drawdown recession hits, portfolio "A" will be down 30% while portfolio "B" will be down 40%. Both will still have the same mortgage payment but portfolio "A" has more cash on hand to weather the storm as it passes through.
And I agree with this, which is why I mentioned liquidity as a reason you might prefer portfolio B to A even if mortgage rates are higher than bond yields. (The emotional argument usually goes the other way, though; many people would rather get rid of debt even if it is not financially optimal.)

But my point is not whether A or B is better, but that it is easier to compare D to C, and B to A (which is the same relationship), when deciding between A and D. If you prefer D to C, and B to A, then you should pay down your mortgage somehow; you can choose to change your percentage allocation or your dollar allocation to stock. If you prefer C to D, and A to B, then you should not pay down your mortgage.
Maybe for some, life fits very nicely on a corporate balance sheet and they adjust their AA monthly with every mortgage payment, but I can assure you that the majority of us do not act this way.
Not monthly for me, because I only rebalance annually, but this is exactly how I do it. My asset allocation spreadsheet has a line "Developed Markets Index: 80% large-cap developed, 20% small-cap developed", and it likewise has a line "Mortgage: -100% bond". When I do my annual rebalance, I update my mortgage balance along with my fund balances, and then decide how much to hold in bonds. If I pay off my mortgage, I will sell international stocks (since that is what I have in my taxable account with the lowest capital gain), and then, since that puts my allocation out of balance, I will sell bonds in my employer plan and buy an equal amount of international stocks.
Although you rebalance yearly based on your mortgage, most people do not follow that practice. Most financial advisors do not recommend the same as well. Although I have no definitive proof, I suspect Vanguard PSA does not follow your pathway either. Generally the recommendation is Age in bonds not (Age plus mortgage value) in bonds. Some do (Age minus 10) or (Age minus 20) in bonds, but again, mortgage is not in the formula.

If one has an AA that they are comfortable with, can sleep at night with, mitigates their risk, adding in the mortgage not only increases complexity, it decreases that investors expected return because it lowers risk unnecessarily.
If I am an early investor in my 30s who sleeps well at night with a 70/30 portfolio, why would I want to adjust it to 30/70 because I also have a mortgage? Again, yes, strictly by math you are 100% correct. But again, we are human beings and not a corporate balance sheet. We create an AA based on our willingness and need to take risk. An early investor should not be sitting on a 30/70 portfolio because they took the incorrect advise of considering their mortgage a negative bond. Even worse, an early investor should not be sitting on 0/100 portfolio because they hold a mortgage and an early investor should not be paying down a low interest rate mortgage when they have no wealth at all, especially if they are forgoing tax deferred space and matching in an effort to create an AA of (Age minus 10) in bonds and hold a mortgage.

I reiterate that a mortgage is not a negative bond and we need to stop spreading this misinformation.
+1. I also agree that a mortgage is not a "negative bond", or any kid of bond, because it is illiquid and cannot be marked to market. It's a debt, pure and simple. If one has the option of paying off/down a debt or not, the question (financially at least) is whether the investor will come out ahead paying off the debt or doing something else with the money. If the investor has already determined an acceptable level of risk via an asset allocation, then that is what should be used to determine how said money should be invested and what the return is likely to be/what the risk is.

Yes, there are no guarantees. But neither are their guarantees that putting your money into you home is the best use for it. What we DO know is that doing so means the money is not available for another purpose with out a loan.

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Re: Mortgage to prepay or not prepay

Post by corn18 » Mon Nov 11, 2019 12:03 pm

Is there a risk difference between these:

1. 60/40 with a $500k mortgage
2. 60/40 with no mortgage

Assume plenty of liquidity, no tax implications and no whatever else you can come up with. Just looking at risk on risk.
Don't do something, just stand there!

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Re: Mortgage to prepay or not prepay

Post by EnjoyIt » Mon Nov 11, 2019 12:09 pm

corn18 wrote:
Mon Nov 11, 2019 12:03 pm
Is there a risk difference between these:

1. 60/40 with a $500k mortgage
2. 60/40 with no mortgage

Assume plenty of liquidity, no tax implications and no whatever else you can come up with. Just looking at risk on risk.
The question is too vague to give a definitive answer. If the 60/40 portfolio value are exactly the same, then adding in a debt on top of it would be more risky and lower one's net worth.

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Re: Mortgage to prepay or not prepay

Post by Admiral » Mon Nov 11, 2019 12:09 pm

corn18 wrote:
Mon Nov 11, 2019 12:03 pm
Is there a risk difference between these:

1. 60/40 with a $500k mortgage
2. 60/40 with no mortgage

Assume plenty of liquidity, no tax implications and no whatever else you can come up with. Just looking at risk on risk.
Trick question. How much money does the person with the $500k mortgage have? Perhaps #1 has $10 million and #2 has $1 million. Which person is better off?

A debt is always a risk...UNLESS one has the money to pay it off, but chooses not to do so. In that case, it's simply a choice with little or no risk.

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Re: Mortgage to prepay or not prepay

Post by epicahab » Mon Nov 11, 2019 3:14 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 once looked up every thread here on the subject and I think you nailed it. For me, a paid off house gives me peace of mind and more flexibility in the kind of jobs I can work. If I hadn't paid it off, knowing me I wouldn't have invested all of that money and I would have found some silly way to spend some of it.

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Re: Mortgage to prepay or not prepay

Post by corn18 » Thu Nov 14, 2019 6:34 pm

Well, I talked to my wife and we decided to payoff our mortgage today. Sure feels good.
Don't do something, just stand there!

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Re: Mortgage to prepay or not prepay

Post by EnjoyIt » Thu Nov 14, 2019 11:16 pm

corn18 wrote:
Thu Nov 14, 2019 6:34 pm
Well, I talked to my wife and we decided to payoff our mortgage today. Sure feels good.
Congrats...Must feel good to get the weight off your shoulders

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Re: Mortgage to prepay or not prepay

Post by Grt2bOutdoors » Fri Nov 15, 2019 6:02 pm

corn18 wrote:
Thu Nov 14, 2019 6:34 pm
Well, I talked to my wife and we decided to payoff our mortgage today. Sure feels good.
Congrats!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Mortgage to prepay or not prepay

Post by Lazareth » Sat Nov 16, 2019 11:27 pm

I found it about 50:50 here. Now age 65 I pulled the trigger and paid off the $150K mortgage in August, using after-tax savings. My big earning years are behind me, wife will retire in two years. While I gave up stock market returns, I view it as shifting to a more conservative posture, having eliminated a fixed $900 monthly outflow for the next 20 years. My overall asset allocation remained unchanged at 55/45.
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