Torn Between Aggressive Home Payoff or Investing

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Orbuculum Nongata
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Orbuculum Nongata »

smitcat wrote: Mon Jan 27, 2020 8:55 am
Presintense wrote: Mon Jan 27, 2020 8:35 am
Shael_AT wrote: Fri Jan 24, 2020 3:28 pm

...Thank you for reading, look forward to some words of wisdom here
You might consider the impact of your home debt if your income declined or went away entirely for a while. There are benefits to reducing debt that go beyond returns. Completely agree with others that it’s a personal decision. Not black and white by any means.
'You might consider the impact of your home debt if your income declined or went away entirely for a while.'
Yes - agreed. We have found it is much better to save the money and not pay down a mortgage early if you should encounter a declined or no income period.
If the OP doesn’t have an emergency fund I could not agree more. Assuming they have an emergency fund in place, I think there are benefits to paying off the mortgage before investing but realize that’s more of a personal opinion based upon my own experience. Others may be at least equally correct investing first. But saving something before you do either (invest or pay down mortgage) is good advice from you.
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slalom
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Re: Torn Between Aggressive Home Payoff or Investing

Post by slalom »

I was in nearly the same exact position as you down to the numbers.

I made the decision to pay a lump sum at the end of the year from bonus while also increasing my extra principal amount once a year (for the whole year).

What seemed like a far away payoff date is starting to feel close now and i don’t regret it at all.

The key I think to not regretting it is still investing in some taxable while maxing out tax advantaged. Being able to do all of the above is a very privileged position and it’s important to be grateful for that!
CBZ
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Re: Torn Between Aggressive Home Payoff or Investing

Post by CBZ »

Hi, we bought our house in a VHCOL area in 2007. We maxed out tax deferred space every year, and had several buckets of debt to attack with after tax money. So I prioritized it this way: 1) after tax portfolio 2) mortgage principal pay down 3) 529 4) Wife's student loans at 1.7% interest. I should preface by saying my income varies every month, but I made it a point to send extra mortgage principal payments every month, so there were a few times when #2 took priority over #1. After refinancing twice, we paid the remaining balance off in 2018 by selling in our after tax account and realizing some gains (which were partially offset by TLH in the December crash). Our mortgage "pay-off" fund was invested in a balanced, equity tilted mutual fund, and I decided to cash out and lock in the gains at that time (fully expecting a bear market in the next several years).

I initially planned on paying the mortgage off when I turned 50 as a present since we're very debt averse. But after 11 years of sending mortgage payments plus extra principal, we made the "emotional" choice to become debt free. Despite the Market's great return in 2019, I don't regret our decision, as it allowed me to basically cut back to approximately 0.8 of full time work in what's considered a very stressful job.

For your situation, I would split extra after-tax monies between your after-tax portfolio and mortgage principal pay down. Perhaps in a ratio of around 2:1 or greater given your youth. My goal was a 3:1 or 4:1 ratio, but some months due to my variable income it was 1:1. Hope this helps.
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Shael_AT
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Shael_AT »

This is an incredible level of engagement, discussion and feedback that I did not expect. Thank you everyone for your kind words and for sharing your experiences and wisdom.

Took the weekend to reflect, think and decide what our go forward strategy is going to be.

Ultimately, we resonated with people here who said that if our NW was higher, this would not be such an issue on our emotional well being. Probably true. However, the advice on splitting efforts 1/3 or 2/3 between additional investing in brokerage and the house really made sense to try out. It's not a permanent configuration.

So, today I took 1/3 of the $774 for the week and put it towards principal on mortgage. Had to click some buttons to do it first time, and to specify its indeed a payment extra on principal, but overall it went well. The rest was sent to our usual investment mix. I think this was rather important, as when we sat there and did the extra payment, nothing changed about how we felt initially. Then, we re-read this entire thread and had some fruitful discussions about it. Overall, we're not very excited about doing additional principal payments, and we discovered this roller coaster of before-button and after-button clicking today.

My palms were sweaty, something, something, mom's spaghetti. :moneybag

Overall, some key points I think we have forgotten, er, lost perspective of, since the money has never had to be used or touched, also considering its digital, is... well, that we have 18 months of cash-money - without lifestyle adjustments, we can live off of. Saying it out loud a few times, it's kind of nuts to think about. It's honestly two bonuses that I never invested that just sat there due to distractions at work, what a strange and privileged place to be in... Additionally, our NW is calculated post-EF and post-house, we do not include our house or EF as part of our net worth total.

It's good to have gone through this exercise, I think we left the discussions with a lot more perspective, focus and especially gratitude for our situation.

Going forward, our plan is going to be, music please, "keep the course- max our tax advantaged accounts, keep brokerage weekly investing momentum, follow the plan, consider 529's due to future 1-5 spawns".

Our rational is almost too simple - reflecting back in December when the market cut down ~ -20%, we were emotionally and intellectually excited :D to throw more and keep the course. And today, we had one of the first 2020 days of somewhat-reasonable negative volatility, and again, we were excited to invest. In 2011 when the market was rocky, or in 2013, or the spats in 2015-2016, we began to remember and recall what it was like - not panic, but a maintained focus and commitment to our plan. It would be a shame not to realize the 10-40 year potential, knock on wood for health and job prospects, of the roughly 40-60 grand we can throw at brokerage compounded along side maxing out our 401k's, roth iras and hsa's.

Finally, I feel lucky to have a partner who I can discuss this with, read over forum posts with and come to consensus in matters of personal finance.

Thank you all, feel free to add more but this thread seems pretty complete.

I'll be sure to report back in future threads. I look forward to either praise, or ridicule, in the future when people quote my post here from this thread in later 2020 through the decade.

:sharebeer
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FiveK
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Re: Torn Between Aggressive Home Payoff or Investing

Post by FiveK »

Shael_AT wrote: Mon Jan 27, 2020 8:06 pmFinally, I feel lucky to have a partner who I can discuss this with, read over forum posts with and come to consensus in matters of personal finance.
A very important consideration. Good luck to you both!
elvisimprsntr
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Re: Torn Between Aggressive Home Payoff or Investing

Post by elvisimprsntr »

Not carrying any other debit and already maxing out all my retirement (401k, HSA) contributions, I made 2X mortgage payments since I can afford it and to make sure house is paid off by retirement so I can live off pension only, delay SS, and eliminate sequence of returns risk in early retirement.

Since I am phased out of rIRA contributions, I am performing t-rIRA conversions while tax brackets are favorable until 2025, and use the $ that would have been for a rIRA contribution to pay the tax out of pocket. Allows me to stuff more $ into rIRA. I've backed off on my mortgage payments a bit (will still be paid off before retirement) so I can perform even larger t-rIRA conversions and not eat into my emergency funds. Even more $ stuffed into rIRA.

GL on what ever you decide.
Last edited by elvisimprsntr on Wed Jan 29, 2020 7:29 am, edited 2 times in total.
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willthrill81
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Re: Torn Between Aggressive Home Payoff or Investing

Post by willthrill81 »

If you've already maxed out all tax-advantaged accounts, the case for paying down/off one's mortgage becomes more compelling. But even before you've reached that point, buying bonds that are yielding under 3% pre-tax (in the case of traditional accounts) while retaining a mortgage with a yield of 4% after-taxes just doesn't sit right with me. It's negative arbitrage, and the only good reason I know of for doing it is to retain adequate liquidity.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

There is something to be said for being debt free or close to debt free. A lot more flexibility and less stress. Plus not as much stress on a portfolio in times of market trauma.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

FiveK wrote: Mon Jan 27, 2020 8:14 pm
Shael_AT wrote: Mon Jan 27, 2020 8:06 pmFinally, I feel lucky to have a partner who I can discuss this with, read over forum posts with and come to consensus in matters of personal finance.
A very important consideration. Good luck to you both!
I agree as this is often overlooked and huge.
John C. Bogle: “Simplicity is the master key to financial success."
zeal
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Re: Torn Between Aggressive Home Payoff or Investing

Post by zeal »

Say you have a loan at 3% interest and enough extra monthly cashflow to pay it off in 10 years with extra principal payments.

If you instead invest the money and it earns an average of 4% annually, then in 9 years you have enough money to pay the loan off in full if you want to.

I made these numbers up but just pointing out a concept. As long as your investments net more than your loan's interest rate, you'll likely be able pay the loan off more quickly by not making extra payments. Of course you won't know if the investments will actually earn more, but that's a risk we always take with the stock market. Also, the difference between the two options is likely only several months to a year, which shows that it really doesn't matter which choice you make in the long run. I know I'm stating the obvious but it took me a while to understand this, and it's ultimately the reason why we don't make extra principal payments. Currently our home equity is about 50% of our net worth, so I have more reasons not to make extra payments! When we have enough money to pay the mortgage in full, then we'll consider whether it's worth doing so.
RobLyons
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Re: Torn Between Aggressive Home Payoff or Investing

Post by RobLyons »

First world problems.

Hedge your bet? Do both? Either way you're doing better than 99% of the population. Congrats!
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stoptothink
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Re: Torn Between Aggressive Home Payoff or Investing

Post by stoptothink »

willthrill81 wrote: Tue Jan 28, 2020 3:02 pm If you've already maxed out all tax-advantaged accounts, the case for paying down/off one's mortgage becomes more compelling. But even before you've reached that point, buying bonds that are yielding under 3% pre-tax (in the case of traditional accounts) while retaining a mortgage with a yield of 4% after-taxes just doesn't sit right with me. It's negative arbitrage, and the only good reason I know of for doing it is to retain adequate liquidity.
That's where we are at. Pair of 401ks, Roth IRAs, family HSA, pair of 529s up to state tax deduction; we're saving $75k+/yr already, with HYS so low, we're throwing everything at the mortgage. Payoff hopefully in ~8 months.
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Ben Mathew
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Ben Mathew »

At 28, I would absolutely keep the mortgage and invest 100% stocks. The lifecycle investing model tells us that you will reduce your lifetime risk by increasing your stock position now and decreasing it closer to retirement.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

When debating paying down debt or investing, I often ask why is it an either/or question? How about building both sides of your personal balance sheet. For any additional money involved you could apply one half to investing and one half to paying down debt. Over time this would work and you will probably be happy.
John C. Bogle: “Simplicity is the master key to financial success."
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Rowan Oak
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Re: Torn Between Aggressive Home Payoff or Investing

Post by Rowan Oak »

abuss368 wrote: Wed Jan 29, 2020 10:11 am When debating paying down debt or investing, I often ask why is it an either/or question? How about building both sides of your personal balance sheet. For any additional money involved you could apply one half to investing and one half to paying down debt. Over time this would work and you will probably be happy.
This is what I did. Worked just fine.
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

Rowan Oak wrote: Wed Jan 29, 2020 10:38 am
abuss368 wrote: Wed Jan 29, 2020 10:11 am When debating paying down debt or investing, I often ask why is it an either/or question? How about building both sides of your personal balance sheet. For any additional money involved you could apply one half to investing and one half to paying down debt. Over time this would work and you will probably be happy.
This is what I did. Worked just fine.
Thanks. Glad to hear the feedback.
John C. Bogle: “Simplicity is the master key to financial success."
KlangFool
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Re: Torn Between Aggressive Home Payoff or Investing

Post by KlangFool »

abuss368 wrote: Wed Jan 29, 2020 10:11 am When debating paying down debt or investing, I often ask why is it an either/or question? How about building both sides of your personal balance sheet. For any additional money involved you could apply one half to investing and one half to paying down debt. Over time this would work and you will probably be happy.
abuss368,

That makes sense if the numbers on both sides are somewhat equal. For example, would you make the same recommendation for the following 2 persons?

A) 500K portfolio with 1.5 million mortgage

B) 1.5 million portfolios with 500K mortgage

I would believe that the answer would be different for (A) versus (B).

KlangFool
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Re: Torn Between Aggressive Home Payoff or Investing

Post by abuss368 »

KlangFool wrote: Wed Jan 29, 2020 11:28 am
abuss368 wrote: Wed Jan 29, 2020 10:11 am When debating paying down debt or investing, I often ask why is it an either/or question? How about building both sides of your personal balance sheet. For any additional money involved you could apply one half to investing and one half to paying down debt. Over time this would work and you will probably be happy.
abuss368,

That makes sense if the numbers on both sides are somewhat equal. For example, would you make the same recommendation for the following 2 persons?

A) 500K portfolio with 1.5 million mortgage

B) 1.5 million portfolios with 500K mortgage

I would believe that the answer would be different for (A) versus (B).

KlangFool
I understand your point but it depends what the needs and goals are which may vary for everyone.
John C. Bogle: “Simplicity is the master key to financial success."
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