Extra mortgage payments OR not

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Topic Author
gurusw
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Joined: Sun May 11, 2008 9:37 am

Extra mortgage payments OR not

Post by gurusw » Mon Jul 27, 2020 10:39 pm

Hi,

I am kind of confused regarding my mortgage situation, and investing. And need some advice.

I'm currently 45. I have a portfolio of 1.3M, and subtracting 100K for emergency expenses, that is 1.2M of investments. It is 55% stocks & the rest is bonds+cash.

I bought a house in bay area 2 years back for $1.18M at 4.375%. That was monthly payment of $4717.
Last year, I refinanced at no cost at 4.125% resulting in monthly payment of $4500.
Now the house is worth $1.13M (according to redfin), and the outstanding loan is $910K.

When I bought the house, the idea was to live for 12-20 years, and then sell it & settle elsewhere for retirement (where houses are cheaper).
The intention was not to pay off the house & live there for retirement, since I do not think that is a viable retirement strategy for my portfolio size. I am in bay area mainly for software jobs.

I wanted to refinance further, but getting refinance on jumbo loan is difficult esp since I hardly have 20% equity. The insane option is to pay $145K and get regular loan at 3.x%. That will take at least 8 years to break even.

Many of my colleagues are paying extra money towards mortgage, and I was wondering if it makes sense for me. I came across the below wiki:
https://www.bogleheads.org/wiki/Paying_ ... _investing

As per the wiki suggestions, I'm already doing the following, and now I just need to decide what to do with the extra cash after all of the following:
- Invest in 401(k) - Full $19.5K
- Pay down credit cards - No loans there
- Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%) - No loans there either

What is your opinion? I literally see 3 options:
1. Continue to invest the incoming cash in 55/45 ratio to stocks/bonds
2. Put $217 more every month towards mortgage principal (since original mortgage payment was $4717 and current is $4500)
3. Pay $145K cash & get regular mortgage at 3.x% (break even period is ~8 years)
Curious to know if I am missing anything.

KlangFool
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Re: Extra mortgage payments OR not

Post by KlangFool » Mon Jul 27, 2020 10:45 pm

OP,

Is it a non-recourse loan? If yes, why pay extra towards the mortgage? In the worst case, walk away from the house and start fresh in some other state.

KlangFool

flyingcows
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Re: Extra mortgage payments OR not

Post by flyingcows » Mon Jul 27, 2020 10:53 pm

KlangFool wrote:
Mon Jul 27, 2020 10:45 pm
OP,

Is it a non-recourse loan? If yes, why pay extra towards the mortgage? In the worst case, walk away from the house and start fresh in some other state.

KlangFool
+1, my mortgage is paid off but if I had a non recourse mortgage I would leverage it to the hilt due to the 100% downside protection!

Topic Author
gurusw
Posts: 177
Joined: Sun May 11, 2008 9:37 am

Re: Extra mortgage payments OR not

Post by gurusw » Mon Jul 27, 2020 11:01 pm

CA is a non-recourse state.

There are some threads on bogleheads mentioning that the loan obtained by refinance is not non-recourse.
But during refinancing I confirmed with the bank that even the refinanced loan is non-recourse.

babystep
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Re: Extra mortgage payments OR not

Post by babystep » Mon Jul 27, 2020 11:29 pm

gurusw wrote:
Mon Jul 27, 2020 10:39 pm
Hi,

I am kind of confused regarding my mortgage situation, and investing. And need some advice.

I'm currently 45. I have a portfolio of 1.3M, and subtracting 100K for emergency expenses, that is 1.2M of investments. It is 55% stocks & the rest is bonds+cash.

I bought a house in bay area 2 years back for $1.18M at 4.375%. That was monthly payment of $4717.
Last year, I refinanced at no cost at 4.125% resulting in monthly payment of $4500.
Now the house is worth $1.13M (according to redfin), and the outstanding loan is $910K.

When I bought the house, the idea was to live for 12-20 years, and then sell it & settle elsewhere for retirement (where houses are cheaper).
The intention was not to pay off the house & live there for retirement, since I do not think that is a viable retirement strategy for my portfolio size. I am in bay area mainly for software jobs.

I wanted to refinance further, but getting refinance on jumbo loan is difficult esp since I hardly have 20% equity. The insane option is to pay $145K and get regular loan at 3.x%. That will take at least 8 years to break even.

Many of my colleagues are paying extra money towards mortgage, and I was wondering if it makes sense for me. I came across the below wiki:
https://www.bogleheads.org/wiki/Paying_ ... _investing

As per the wiki suggestions, I'm already doing the following, and now I just need to decide what to do with the extra cash after all of the following:
- Invest in 401(k) - Full $19.5K
- Pay down credit cards - No loans there
- Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%) - No loans there either

What is your opinion? I literally see 3 options:
1. Continue to invest the incoming cash in 55/45 ratio to stocks/bonds
2. Put $217 more every month towards mortgage principal (since original mortgage payment was $4717 and current is $4500)
3. Pay $145K cash & get regular mortgage at 3.x% (break even period is ~8 years)
Curious to know if I am missing anything.
In your situation and such a high mortgage interest rate, you have too much in bonds.
40% of 1.2M is 480k. I am not including your 100k of emergency. How about sell the bonds and pay towards the mortgage to less than 20% and refi for 3.x rate. This action will get you 4.125% after-tax return guaranteed. Also, it will reduce the mortgage interest rate by about 1%.

shess
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Re: Extra mortgage payments OR not

Post by shess » Mon Jul 27, 2020 11:31 pm

gurusw wrote:
Mon Jul 27, 2020 10:39 pm
3. Pay $145K cash & get regular mortgage at 3.x% (break even period is ~8 years)
I'm not sure what the "break even" you're referring to is, here.

In some cases, you can do something like pay points at the front end in exchange for a lower rate. This leads to a break-even calculation which is how long you have to hold the loan before the lower rates make up for the points paid.

But in your case, I think you're saying to get your loan amount down to a conforming amount by increasing your equity. In that case, you still own that asset, it's just no longer liquid. If you sell the house for more than your current loan amount, you're in an identical position, except for whatever you saved in interest (and perhaps lost in opportunity costs on the investing side). So IMHO, it's a straight comparison between the rates you're paying now and the risk and returns you expect with whatever you're currently putting that money in.

I mention the loan amount because if you add equity and the house goes below your current loan amount, now you're losing money you previously would not have lost. Being able to leave the bank holding that bag has non-zero value, though I've never had a good intuition for how to properly value it.

Topic Author
gurusw
Posts: 177
Joined: Sun May 11, 2008 9:37 am

Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 12:39 am

babystep wrote:
Mon Jul 27, 2020 11:29 pm
In your situation and such a high mortgage interest rate, you have too much in bonds.
40% of 1.2M is 480k. I am not including your 100k of emergency. How about sell the bonds and pay towards the mortgage to less than 20% and refi for 3.x rate. This action will get you 4.125% after-tax return guaranteed. Also, it will reduce the mortgage interest rate by about 1%.
3.x% rate is for non-jumbo loan. To get there, I need to pay $145K. Is that acceptable to you.

Yes, I've $480K in bonda+cash. But as a good boglehead, most of it is in retirement accounts. Maybe I can do switcheroo.

Topic Author
gurusw
Posts: 177
Joined: Sun May 11, 2008 9:37 am

Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 12:45 am

shess wrote:
Mon Jul 27, 2020 11:31 pm

I'm not sure what the "break even" you're referring to is, here.

In some cases, you can do something like pay points at the front end in exchange for a lower rate. This leads to a break-even calculation which is how long you have to hold the loan before the lower rates make up for the points paid.

But in your case, I think you're saying to get your loan amount down to a conforming amount by increasing your equity. In that case, you still own that asset, it's just no longer liquid. If you sell the house for more than your current loan amount, you're in an identical position, except for whatever you saved in interest (and perhaps lost in opportunity costs on the investing side). So IMHO, it's a straight comparison between the rates you're paying now and the risk and returns you expect with whatever you're currently putting that money in.

I mention the loan amount because if you add equity and the house goes below your current loan amount, now you're losing money you previously would not have lost. Being able to leave the bank holding that bag has non-zero value, though I've never had a good intuition for how to properly value it.
So let's say, I pay $144K to have conforming loan; and then I start saving $1.5K per month in principal+interest. That will be $18K savings per year; or $144K in 8 years. Hence I am saying my break even is 8 years.

babystep
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Re: Extra mortgage payments OR not

Post by babystep » Tue Jul 28, 2020 12:47 am

gurusw wrote:
Tue Jul 28, 2020 12:39 am
babystep wrote:
Mon Jul 27, 2020 11:29 pm
In your situation and such a high mortgage interest rate, you have too much in bonds.
40% of 1.2M is 480k. I am not including your 100k of emergency. How about sell the bonds and pay towards the mortgage to less than 20% and refi for 3.x rate. This action will get you 4.125% after-tax return guaranteed. Also, it will reduce the mortgage interest rate by about 1%.
3.x% rate is for non-jumbo loan. To get there, I need to pay $145K. Is that acceptable to you.

Yes, I've $480K in bonda+cash. But as a good boglehead, most of it is in retirement accounts. Maybe I can do switcheroo.
Yes, I would do that. Say sell 200k of equities from taxable. Choose carefully to minimize the taxes on gains, if any.

Sell 200k of bonds in 401k and use the proceeds to buy the total market in 401k. Your exposure to stocks remains same.

Now, you have 200k in cash in the taxable. Use this to refi and reduce the interest rate.

Topic Author
gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 12:49 am

If I really pay $145K to have conforming loan, my stock/bond ratio will become approx 70/30 (from 55/45). Do I adjust it back to 55/45 or not?
What are the arguments for adjusting and against doing so? This is where part of the confusion is :)

babystep
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Re: Extra mortgage payments OR not

Post by babystep » Tue Jul 28, 2020 1:01 am

You are not taking into account the mortgage as an illiquid negative bond when you are calculating the AA. As of now, you are actually borrowing against the house to invest in the 55/45.

By using the bonds money to reduce the mortgage, you just bought a bond yourself that returns 4.1% interest after tax. Effectively, you still hold the same $amounts in the bonds and stocks.

I wouldn't adjust anything. If it makes you more comfortable then for future contributions, you can keep doing at 55/45.

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ray.james
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Re: Extra mortgage payments OR not

Post by ray.james » Tue Jul 28, 2020 1:03 am

GuruSW,

You can calculate the return on your 145k by using mortgage professor calculator 3f. The calculator takes 3 colums - first one is current terms, second is simple refinance with out paying down(3.5% no cost 30 year fixed), third one is paying down(145K case, 3.0 30 year fixed).
When I in put your numbers, I get 10% return against current loan by putting 145K. However the return against the current no cost refi is 5.8%

Also, Wells Fargo, BOFA, Citi are offering 3.375 for refinance for 30 year fixed. 3.5% at US bank. If you go the ARM route, 10/1 is at 3.0 at multiple banks for jumbo. If you are going conventional route, you can do sub 3.0 30 year fixed rates. Are you sure your rate assumptions are correct?

Personally, I would pay down bonds to go to conventional( at <3.0 rates).
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

shess
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Re: Extra mortgage payments OR not

Post by shess » Tue Jul 28, 2020 1:24 am

gurusw wrote:
Tue Jul 28, 2020 12:45 am
So let's say, I pay $144K to have conforming loan; and then I start saving $1.5K per month in principal+interest. That will be $18K savings per year; or $144K in 8 years. Hence I am saying my break even is 8 years.
Yes, but the $144k didn't go away, it's still present as equity in your home. So you aren't "even" after 8 years, you have $144k in home equity plus you've saved an additional $144k on top of that.

Jack FFR1846
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Re: Extra mortgage payments OR not

Post by Jack FFR1846 » Tue Jul 28, 2020 9:05 am

Dave Ramsey: "It's debt. You'd be an idiot not to pay down that mortgage"

Ric Edelman: "Money is cheap and you'll get raises making your mortgage cheaper over time. You'd be an idiot to pay down that mortgage."

Take your choice. I'm not a fan of bribing a bank into giving you a lower rate.
Bogle: Smart Beta is stupid

tashnewbie
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Re: Extra mortgage payments OR not

Post by tashnewbie » Tue Jul 28, 2020 9:16 am

Deleted my post because I don't know if it is helpful/makes sense.
Last edited by tashnewbie on Tue Jul 28, 2020 10:10 am, edited 1 time in total.

lakpr
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Re: Extra mortgage payments OR not

Post by lakpr » Tue Jul 28, 2020 9:25 am

My view -- the Tax Cuts and Jobs Act has made the maximum amount of mortgage interest that is deductible, is a principal amount of $750k. Unfortunately this amount is *NOT* indexed for inflation either.

In other words, on that specific part of the balance that is more than $750k -- which is $910k - $750k = $260k, you are paying an after-tax 4.125% interest rate. That is four-times the interest you are earning on the bond portion of your portfolio (Total bond is paying 1.4% nominal nowadays, and at a bare minimum tax rate of 24% + 9.3% = 33.3% in California Bay Area, that's after-tax 0.92%)

Sacrificing a bit of liquidity to earn 4 times the interest rate, is definitely worth it in my opinion; recourse-loan or non-recourse-loan not withstanding.

Once you do get to the $750k threshold, things get a bit trickier, since the mortgage interest now becomes deductible. At a 3.875% 30-year confirming mortgage for $750k (assuming a successful refinance), the interest paid per year is $29k, easily exceeding the standard deduction. It does not, however, provide you the full deduction on the entire interest, only on the $14k ($10k property taxes minimum assumed; total itemized deductions = $10k prop. tax + $29k interest = $39k; difference = $14k, rounding off the $24,800 standard deduction to $25k). $14k interest on a $750k mortgage is deductible = 1.87% of it is deductible, or the effective mortgage rate is only 3% nominal.

That situation persists until the property-tax threshold $10k + interest paid = standard deduction $24,800; today that amount is $14,800/(0.03875) = $382k. Since the standard deduction is indexed to inflation, tomorrow that amount rises a bit -- but safe to say that there is at least $300k buffer before the itemized deductions start bumping into the standard deduction, which is at least 7 to 8 years away if not longer for the OP.

I recommend the plan of action, therefore:
- pay down the mortgage until $750k
- Refinance to a confirming loan to lower the interest rate
- Pay just the minimum needed to cover the monthly nut until the balance reaches $450k
- Then scramble again like mad to pay the rest of the mortgage off

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Tue Jul 28, 2020 9:38 am

gurusw wrote:
Mon Jul 27, 2020 10:39 pm
Hi,

Last year, I refinanced at no cost at 4.125% resulting in monthly payment of $4500.
Now the house is worth $1.13M (according to redfin), and the outstanding loan is $910K. . . .

I wanted to refinance further, but getting refinance on jumbo loan is difficult esp since I hardly have 20% equity. The insane option is to pay $145K and get regular loan at 3.x%. That will take at least 8 years to break even.
The sane option is to reduce your bond holdings and pay down the mortgage to $726,000 so you can get a conventional fixed mortgage (not jumbo). You should be able to find no cost options at around 2.9% on a 30 or 2.6% on a 15. It does not take 8 years to break even. You are ahead on day 1. Personally I'd go with the 15 year, but reasonable minds could differ. Dropping more than a point off a large mortgage and retiring high cost debt with low interest bonds is a no brainer.

tashnewbie
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Re: Extra mortgage payments OR not

Post by tashnewbie » Tue Jul 28, 2020 9:56 am

lakpr wrote:
Tue Jul 28, 2020 9:25 am
Once you do get to the $750k threshold, things get a bit trickier, since the mortgage interest now becomes deductible. At a 3.875% 30-year confirming mortgage for $750k (assuming a successful refinance), the interest paid per year is $29k, easily exceeding the standard deduction. It does not, however, provide you the full deduction on the entire interest, only on the $14k ($10k property taxes minimum assumed; total itemized deductions = $10k prop. tax + $29k interest = $39k; difference = $14k, rounding off the $24,800 standard deduction to $25k). $14k interest on a $750k mortgage is deductible = 1.87% of it is deductible, or the effective mortgage rate is only 3% nominal.
Great analysis. How do you calculate the effective mortgage rate as 3% nominal? In your example, would he be paying $15k/year interest?

I assume the analysis would change if tax filing status is single (only $12,200 standard deduction) and would be even more favorable to OP to itemize deductions and continue making monthly payments (after a successful refinance to a conforming loan) until mortgage is $56,774 ($2200/.03875)?

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Tue Jul 28, 2020 10:03 am

lakpr wrote:
Tue Jul 28, 2020 9:25 am
I recommend the plan of action, therefore:
- pay down the mortgage until $750k
- Refinance to a confirming loan to lower the interest rate
- Pay just the minimum needed to cover the monthly nut until the balance reaches $450k
- Then scramble again like mad to pay the rest of the mortgage off
Assuming the OP lives in a HCOLA, as it appears from the post, it does not make sense to pay the nearly 1 point premium on a jumbo loan for $750,000, when a mere $24,000 gets you the much better conforming rate. That is very expensive money.

I don't understand the need to "scramble" once the mortgage hits $450,000? That's just the old pay-off vs. invest debate . . .

lakpr
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Re: Extra mortgage payments OR not

Post by lakpr » Tue Jul 28, 2020 10:31 am

Outer Marker wrote:
Tue Jul 28, 2020 10:03 am
Assuming the OP lives in a HCOLA, as it appears from the post, it does not make sense to pay the nearly 1 point premium on a jumbo loan for $750,000, when a mere $24,000 gets you the much better conforming rate. That is very expensive money.

I don't understand the need to "scramble" once the mortgage hits $450,000? That's just the old pay-off vs. invest debate . . .
Agreed on the confirming mortgage vs. jumbo mortgage, for only $24k in additional principal payment. That is expensive.

After the mortgage balance hits $450k, I assumed his mortgage interest rate is 3.875%, so the annual interest he would pay = $17437.
Coupled with the max property taxes of $10k for itemizing, his overall itemized deductions = $27,437.

Remember that I am projecting this to happen in about 7 years or so, it's reasonable to expect that, with inflation, in 7 years the standard deduction will be $27,500. Break-even.

OR, stated in other words, from that point on, there is no tax benefit for the mortgage interest. That 3.875% interest rate becomes AFTER-TAX interest rate, which will STILL be more than what the Total Bond Market will be paying.

lakpr
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Re: Extra mortgage payments OR not

Post by lakpr » Tue Jul 28, 2020 10:38 am

tashnewbie wrote:
Tue Jul 28, 2020 9:56 am
lakpr wrote:
Tue Jul 28, 2020 9:25 am
Once you do get to the $750k threshold, things get a bit trickier, since the mortgage interest now becomes deductible. At a 3.875% 30-year confirming mortgage for $750k (assuming a successful refinance), the interest paid per year is $29k, easily exceeding the standard deduction. It does not, however, provide you the full deduction on the entire interest, only on the $14k ($10k property taxes minimum assumed; total itemized deductions = $10k prop. tax + $29k interest = $39k; difference = $14k, rounding off the $24,800 standard deduction to $25k). $14k interest on a $750k mortgage is deductible = 1.87% of it is deductible, or the effective mortgage rate is only 3% nominal.
Great analysis. How do you calculate the effective mortgage rate as 3% nominal? In your example, would he be paying $15k/year interest?

I assume the analysis would change if tax filing status is single (only $12,200 standard deduction) and would be even more favorable to OP to itemize deductions and continue making monthly payments (after a successful refinance to a conforming loan) until mortgage is $56,774 ($2200/.03875)?
Well, he is getting a tax-benefit only on the excess above standard deduction, right?
That excess is $39k (total itemized deduction) - $25k (standard deduction is $24,800 but I slightly rounded up to $25k) = $14k

Tax-benefit on $14k = $4.5k (24% + 9.3% state tax rate assumed).
Total interest the OP actually pays on $750k = $29k, in the part you quoted me above.
So total after-tax interest = $29k - $4.5k = $24.5k. Or total after-tax interest rate = $24.5k interest / $750k principal = approximately 3%.

===============

That said, in California, the entire mortgage interest is deductible no matter what the principal balance is, I forgot that bit; so my earlier calculations should be taken as approximate and only to illustrate how to calculate effective mortgage interest rate.

Yes, if the OP is single, then the threshold gets lowered to only $57k ($2200 / 0.03875)

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Tue Jul 28, 2020 11:01 am

lakpr wrote:
Tue Jul 28, 2020 10:31 am
In about 7 years or so, it's reasonable to expect that, with inflation, in 7 years the standard deduction will be $27,500. Break-even.

OR, stated in other words, from that point on, there is no tax benefit for the mortgage interest. That 3.875% interest rate becomes AFTER-TAX interest rate, which will STILL be more than what the Total Bond Market will be paying.
Agree with your analysis that holding an expensive mortgage vs. low-yielding bonds makes no sense. However, if you get the mortgage down to today's super low confirming rates in the 2.5% range, it could be a closer call.

Although beyond the scope of OP's post, I think that with 10-20 years in the workforce with a high-paying job, a 55/45 AA is unduly conservative. Better that than panic sell if you have a low risk tolerance, but personally I'd hold more in equities.

As for paying down the loan to get the lower rate, I'd use a sizeable portion of the emergency cash. It could, if desired, be rebuilt over time with the surplus savings from the new lower mortgage payments. With a 7 figure portfolio, you've got considerable flexility and liquidity in the event of a true emergency; I no longer have a separate emergency fund.

lakpr
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Re: Extra mortgage payments OR not

Post by lakpr » Tue Jul 28, 2020 11:15 am

Outer Marker wrote:
Tue Jul 28, 2020 11:01 am
Agree with your analysis that holding an expensive mortgage vs. low-yielding bonds makes no sense. However, if you get the mortgage down to today's super low confirming rates in the 2.5% range, it could be a closer call.

Although beyond the scope of OP's post, I think that with 10-20 years in the workforce with a high-paying job, a 55/45 AA is unduly conservative. Better that than panic sell if you have a low risk tolerance, but personally I'd hold more in equities.

As for paying down the loan to get the lower rate, I'd use a sizeable portion of the emergency cash. It could, if desired, be rebuilt over time with the surplus savings from the new lower mortgage payments. With a 7 figure portfolio, you've got considerable flexility and liquidity in the event of a true emergency; I no longer have a separate emergency fund.
Agreed with you on all the points. Once the mortgage rate gets down to 2.5% levels, that's a NOMINAL interest rate, and it's reasonable to expect more than that even in bond-heavy funds like VTINX over the long run.

Yes, for a 45 year old, having 45% in bonds is way too conservative. I hold "Age-20" in bonds in my own portfolio

neverpanic
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Re: Extra mortgage payments OR not

Post by neverpanic » Tue Jul 28, 2020 11:46 am

babystep wrote:
Tue Jul 28, 2020 1:01 am
By using the bonds money to reduce the mortgage, you just bought a bond yourself that returns 4.1% interest after tax. Effectively, you still hold the same $amounts in the bonds and stocks.
Mortgage rates are so low right now that I am unable to see any rationale for not moving to a 3.1-3.2% 30-year or a 2.8-2.9% 15-year.

OP, I believe you should adjust your break even calculation. The refi at this time gives buys you a guaranteed return that's greater than what your bonds are going to pay.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.

babystep
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Re: Extra mortgage payments OR not

Post by babystep » Tue Jul 28, 2020 12:24 pm

lakpr wrote:
Tue Jul 28, 2020 10:38 am
tashnewbie wrote:
Tue Jul 28, 2020 9:56 am
lakpr wrote:
Tue Jul 28, 2020 9:25 am
Once you do get to the $750k threshold, things get a bit trickier, since the mortgage interest now becomes deductible. At a 3.875% 30-year confirming mortgage for $750k (assuming a successful refinance), the interest paid per year is $29k, easily exceeding the standard deduction. It does not, however, provide you the full deduction on the entire interest, only on the $14k ($10k property taxes minimum assumed; total itemized deductions = $10k prop. tax + $29k interest = $39k; difference = $14k, rounding off the $24,800 standard deduction to $25k). $14k interest on a $750k mortgage is deductible = 1.87% of it is deductible, or the effective mortgage rate is only 3% nominal.
Great analysis. How do you calculate the effective mortgage rate as 3% nominal? In your example, would he be paying $15k/year interest?

I assume the analysis would change if tax filing status is single (only $12,200 standard deduction) and would be even more favorable to OP to itemize deductions and continue making monthly payments (after a successful refinance to a conforming loan) until mortgage is $56,774 ($2200/.03875)?
Well, he is getting a tax-benefit only on the excess above standard deduction, right?
That excess is $39k (total itemized deduction) - $25k (standard deduction is $24,800 but I slightly rounded up to $25k) = $14k

Tax-benefit on $14k = $4.5k (24% + 9.3% state tax rate assumed).
Total interest the OP actually pays on $750k = $29k, in the part you quoted me above.
So total after-tax interest = $29k - $4.5k = $24.5k. Or total after-tax interest rate = $24.5k interest / $750k principal = approximately 3%.

===============

That said, in California, the entire mortgage interest is deductible no matter what the principal balance is, I forgot that bit; so my earlier calculations should be taken as approximate and only to illustrate how to calculate effective mortgage interest rate.

Yes, if the OP is single, then the threshold gets lowered to only $57k ($2200 / 0.03875)
The max is 1million for California.

lakpr
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Re: Extra mortgage payments OR not

Post by lakpr » Tue Jul 28, 2020 12:27 pm

babystep wrote:
Tue Jul 28, 2020 12:24 pm
lakpr wrote:
Tue Jul 28, 2020 10:38 am
That said, in California, the entire mortgage interest is deductible no matter what the principal balance is, I forgot that bit; so my earlier calculations should be taken as approximate and only to illustrate how to calculate effective mortgage interest rate.

Yes, if the OP is single, then the threshold gets lowered to only $57k ($2200 / 0.03875)
The max is 1million for California.
Oh, thanks for letting me know! Didn't know there is a limit.

RTF
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Re: Extra mortgage payments OR not

Post by RTF » Tue Jul 28, 2020 12:37 pm

Outer Marker wrote:
Tue Jul 28, 2020 11:01 am
lakpr wrote:
Tue Jul 28, 2020 10:31 am
In about 7 years or so, it's reasonable to expect that, with inflation, in 7 years the standard deduction will be $27,500. Break-even.

OR, stated in other words, from that point on, there is no tax benefit for the mortgage interest. That 3.875% interest rate becomes AFTER-TAX interest rate, which will STILL be more than what the Total Bond Market will be paying.
Agree with your analysis that holding an expensive mortgage vs. low-yielding bonds makes no sense. However, if you get the mortgage down to today's super low confirming rates in the 2.5% range, it could be a closer call.

Although beyond the scope of OP's post, I think that with 10-20 years in the workforce with a high-paying job, a 55/45 AA is unduly conservative. Better that than panic sell if you have a low risk tolerance, but personally I'd hold more in equities.

As for paying down the loan to get the lower rate, I'd use a sizeable portion of the emergency cash. It could, if desired, be rebuilt over time with the surplus savings from the new lower mortgage payments. With a 7 figure portfolio, you've got considerable flexility and liquidity in the event of a true emergency; I no longer have a separate emergency fund.


I just wanted to echo this post as well. Given the OP’s situation, the AA seems ultra conservative and leaving a lot on the table. It sounds like you’re really in your prime earning/accumulating years where a much more aggressive equity position would pay off 20yrs from now.

acegolfer
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Re: Extra mortgage payments OR not

Post by acegolfer » Tue Jul 28, 2020 4:45 pm

gurusw wrote:
Mon Jul 27, 2020 10:39 pm
As per the wiki suggestions, I'm already doing the following, and now I just need to decide what to do with the extra cash after all of the following:
- Invest in 401(k) - Full $19.5K
- Pay down credit cards - No loans there
- Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%) - No loans there either
Pay down or pay off?

You should pay off (not pay down) higher interest rate loans before considering paying down mortgage loan.

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 11:07 pm

Wow, thanks for all the replies. Yesterday I thought majority is telling me to take advantage of non-recourse loan. Now the tide has turned.
ray.james wrote:
Tue Jul 28, 2020 1:03 am
You can calculate the return on your 145k by using mortgage professor calculator 3f.
Btw which is "mortgage professor calculator 3f"? I do not see it here: https://www.mtgprofessor.com/Calculator ... ators.html

Topic Author
gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 11:10 pm

lakpr wrote:
Tue Jul 28, 2020 10:31 am
Outer Marker wrote:
Tue Jul 28, 2020 10:03 am
Assuming the OP lives in a HCOLA, as it appears from the post, it does not make sense to pay the nearly 1 point premium on a jumbo loan for $750,000, when a mere $24,000 gets you the much better conforming rate. That is very expensive money.

I don't understand the need to "scramble" once the mortgage hits $450,000? That's just the old pay-off vs. invest debate . . .
Agreed on the confirming mortgage vs. jumbo mortgage, for only $24k in additional principal payment. That is expensive.
I didn't quite get this conjecture. How do you get $24K in additional principal payment? We're talking about paying $145K in additional principal payments :)

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Tue Jul 28, 2020 11:16 pm

Outer Marker wrote:
Tue Jul 28, 2020 9:38 am
The sane option is to reduce your bond holdings and pay down the mortgage to $726,000 so you can get a conventional fixed mortgage (not jumbo). You should be able to find no cost options at around 2.9% on a 30 or 2.6% on a 15. It does not take 8 years to break even. You are ahead on day 1. Personally I'd go with the 15 year, but reasonable minds could differ. Dropping more than a point off a large mortgage and retiring high cost debt with low interest bonds is a no brainer.
Oh! You are saying $750K is still jumbo loan, and $726K will get to conforming loan. For me $765K is conforming loan.
Fannie Mae and Freddie Mac conforming loan limits in California for 2020 have been increased. The baseline Conforming loan limit is now $510,400 for most counties in California and some high-cost counties it's as high as $765,600.

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ray.james
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Re: Extra mortgage payments OR not

Post by ray.james » Tue Jul 28, 2020 11:53 pm

gurusw wrote:
Tue Jul 28, 2020 11:07 pm
Wow, thanks for all the replies. Yesterday I thought majority is telling me to take advantage of non-recourse loan. Now the tide has turned.
ray.james wrote:
Tue Jul 28, 2020 1:03 am
You can calculate the return on your 145k by using mortgage professor calculator 3f.
Btw which is "mortgage professor calculator 3f"? I do not see it here: https://www.mtgprofessor.com/Calculator ... ators.html
This is all the calculators and the description. https://www.mtgprofessor.com/calculators.htm
3f is here: https://www.mtgprofessor.com/calculator ... tor3f.html
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Wed Jul 29, 2020 5:53 am

gurusw wrote:
Tue Jul 28, 2020 11:16 pm
Outer Marker wrote:
Tue Jul 28, 2020 9:38 am
The sane option is to reduce your bond holdings and pay down the mortgage to $726,000 so you can get a conventional fixed mortgage (not jumbo). You should be able to find no cost options at around 2.9% on a 30 or 2.6% on a 15. It does not take 8 years to break even. You are ahead on day 1. Personally I'd go with the 15 year, but reasonable minds could differ. Dropping more than a point off a large mortgage and retiring high cost debt with low interest bonds is a no brainer.
Oh! You are saying $750K is still jumbo loan, and $726K will get to conforming loan. For me $765K is conforming loan.
Fannie Mae and Freddie Mac conforming loan limits in California for 2020 have been increased. The baseline Conforming loan limit is now $510,400 for most counties in California and some high-cost counties it's as high as $765,600.
My bad. If the limits have increased, so much the better for you. (When I did my last purchase in 2019, $726,000 was the HCOLA limit.) Just be sure you don't pay a jumbo premium. Recommend you get a quote from AmeriSave. I've done close to 20 loans with them and always found them to be the most competitive.

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Wed Jul 29, 2020 6:38 am

gurusw wrote:
Tue Jul 28, 2020 12:49 am
If I really pay $145K to have conforming loan, my stock/bond ratio will become approx 70/30 (from 55/45). Do I adjust it back to 55/45 or not?
What are the arguments for adjusting and against doing so? This is where part of the confusion is :)
This is the most important investing decision you have to make. An interesting little exercise is to take Vanguard's questionare. I found it to be spot on with my own chosen allocation after many years of investing. https://personal.vanguard.com/us/FundsInvQuestionnaire. Curious what your results might be . . .

Also, for reference, this is an interesting guide on what you might expect in terms of returns and ups and downs along the way. https://personal.vanguard.com/us/insigh ... llocations

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Re: Extra mortgage payments OR not

Post by grabiner » Wed Jul 29, 2020 10:36 am

gurusw wrote:
Tue Jul 28, 2020 12:49 am
If I really pay $145K to have conforming loan, my stock/bond ratio will become approx 70/30 (from 55/45). Do I adjust it back to 55/45 or not?
What are the arguments for adjusting and against doing so? This is where part of the confusion is :)
I prefer to view the mortgage as a negative bond. If you sell $145K in bonds to reduce your mortgage balance by $145K, then you haven't changed your stock-market risk, even though you have changed the percentage of your portfolio which is in stock.

Another way to view this is that you can afford a riskier allocation once you have paid down the mortgage, because you will be investing more in the future and thus your current portfolio will be a smaller fraction of your retirement income. (And you can afford an even riskier allocation once the mortgage is paid off, as the home will provide a large part of your retirement standard of living.)

The negative bond is the view I took. I set my asset allocation to 100% net stock when I bought a home in 2013; my bond allocation was equal to my mortgage balance. As retirement approached, I decreased the net stock allocation (and the gross stock allocation decreased more slowly since the mortgage was paid down). In 2020, I was 88% net stock. I paid off the mortgage in March, selling only bonds, to keep the same stock-market exposure at 88% stock.
Wiki David Grabiner

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Wed Jul 29, 2020 12:18 pm

Outer Marker wrote:
Wed Jul 29, 2020 5:53 am
Recommend you get a quote from AmeriSave. I've done close to 20 loans with them and always found them to be the most competitive.
Is that through Costco?

Outer Marker
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Re: Extra mortgage payments OR not

Post by Outer Marker » Wed Jul 29, 2020 12:19 pm

gurusw wrote:
Wed Jul 29, 2020 12:18 pm
Outer Marker wrote:
Wed Jul 29, 2020 5:53 am
Recommend you get a quote from AmeriSave. I've done close to 20 loans with them and always found them to be the most competitive.
Is that through Costco?
No, its a very competitive online mortgage broker.

shess
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Re: Extra mortgage payments OR not

Post by shess » Wed Jul 29, 2020 12:22 pm

Outer Marker wrote:
Wed Jul 29, 2020 5:53 am
gurusw wrote:
Tue Jul 28, 2020 11:16 pm
Outer Marker wrote:
Tue Jul 28, 2020 9:38 am
The sane option is to reduce your bond holdings and pay down the mortgage to $726,000 so you can get a conventional fixed mortgage (not jumbo). You should be able to find no cost options at around 2.9% on a 30 or 2.6% on a 15. It does not take 8 years to break even. You are ahead on day 1. Personally I'd go with the 15 year, but reasonable minds could differ. Dropping more than a point off a large mortgage and retiring high cost debt with low interest bonds is a no brainer.
Oh! You are saying $750K is still jumbo loan, and $726K will get to conforming loan. For me $765K is conforming loan.
Fannie Mae and Freddie Mac conforming loan limits in California for 2020 have been increased. The baseline Conforming loan limit is now $510,400 for most counties in California and some high-cost counties it's as high as $765,600.
My bad. If the limits have increased, so much the better for you. (When I did my last purchase in 2019, $726,000 was the HCOLA limit.) Just be sure you don't pay a jumbo premium. Recommend you get a quote from AmeriSave. I've done close to 20 loans with them and always found them to be the most competitive.
Note that you could also get a conforming primary, and a second mortgage to make up the difference. The blended rate will probably be worse than on the jumbo, but you can pay down the second aggressively independently from the first. I would be surprised if you can get as good of a rate on the first as you could get if your entire loan amount were conforming, though. If the distance to conforming were small enough, you could perhaps do it with a HELOC, also.

IMHO this is just another way of committing to the conforming limit, you're just taking a bit more time to get there. You _probably_ would want to work through a broker for something like this.

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Re: Extra mortgage payments OR not

Post by Outer Marker » Wed Jul 29, 2020 12:27 pm

shess wrote:
Wed Jul 29, 2020 12:22 pm
Note that you could also get a conforming primary, and a second mortgage to make up the difference. The blended rate will probably be worse than on the jumbo, but you can pay down the second aggressively independently from the first. I would be surprised if you can get as good of a rate on the first as you could get if your entire loan amount were conforming, though. If the distance to conforming were small enough, you could perhaps do it with a HELOC, also.

IMHO this is just another way of committing to the conforming limit, you're just taking a bit more time to get there. You _probably_ would want to work through a broker for something like this.
With surplus money sitting in cash and bonds I would not do this. Just pay it down to $750,000 and be done.

lstone19
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Re: Extra mortgage payments OR not

Post by lstone19 » Wed Jul 29, 2020 12:41 pm

shess wrote:
Tue Jul 28, 2020 1:24 am
gurusw wrote:
Tue Jul 28, 2020 12:45 am
So let's say, I pay $144K to have conforming loan; and then I start saving $1.5K per month in principal+interest. That will be $18K savings per year; or $144K in 8 years. Hence I am saying my break even is 8 years.
Yes, but the $144k didn't go away, it's still present as equity in your home. So you aren't "even" after 8 years, you have $144k in home equity plus you've saved an additional $144k on top of that.
I agree with this. "Pay" $144K implies an expense and the money is gone. What you'd be doing is reducing an asset (cash) to reduce a liability (the loan balance). Liabilities are just negative assets so it can also be considered an an asset exchange, not an expense. It may take you eight years to get your cash position back where it was but that's not the same as "break-even". Assuming there's no cost to you get the cash for the $144K and assuming the cash is earning less than the mortgage rate, you break-even and are ahead right from day 1.

If you did this and then the next day, decided to sell the house, your loan payoff is now $144K less. Once the sale closes, you'd have the $144K back in hand.

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Wed Jul 29, 2020 10:28 pm

grabiner wrote:
Wed Jul 29, 2020 10:36 am
The negative bond is the view I took. I set my asset allocation to 100% net stock when I bought a home in 2013; my bond allocation was equal to my mortgage balance. As retirement approached, I decreased the net stock allocation (and the gross stock allocation decreased more slowly since the mortgage was paid down). In 2020, I was 88% net stock. I paid off the mortgage in March, selling only bonds, to keep the same stock-market exposure at 88% stock.
I'm still trying to wrap my head around how do you do your AA calculations.

1. Let's say, you have 1 million portfolio to invest.
2. Your house value is also 1 million, and you have $500K equity in the house.
3. Your mortgage is $3K/month. $1K is towards principal and $2K is towards interest in the current month.
4. Effectively you want 60/40 allocation for your age.

Can you please explain how would you go on splitting and maintaining your assets?

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Wed Jul 29, 2020 10:42 pm

When you think you have all sorted out, life throws a curve ball at you!

Today my employer announced that they are going to let people work from anywhere, and you will be required to come to office only once a month.
People are already WFH in the pandemic, but some were asking HR about long-term WFH to plan their future; and today the employer took stance.

As far as my family is concerned, we have been through 3 states, 4 cities, and 6 houses/apartments in last 10 years; and we are just tired of moving. Also my son is 12 and we wanted to stick this house at least till he finishes his high-school (6 more years).

But I'm worried that if this WFH trend catches up, the RE prices would start declining in bay area. So whether it's prudent to put $145K to reduce payments; or keep the status quo & keep non-recourse way open!

Even if we stick for 6 years, I'll still have to spend money on some upgrades/repairs for bathroom, roof, and other minor things. We have been postponing all this in the current times because nothing in urgent. But once panemic is over, we'd like to get these things done to make the plac livable.

Also I'm not sure if BHs pay for kid's college, or not. So that would be another consideration before committing the monies.

Too much confusion. I am just venting out. Not sure whether there are right answers in this situation.

shess
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Re: Extra mortgage payments OR not

Post by shess » Wed Jul 29, 2020 10:53 pm

gurusw wrote:
Wed Jul 29, 2020 10:42 pm
But I'm worried that if this WFH trend catches up, the RE prices would start declining in bay area. So whether it's prudent to put $145K to reduce payments; or keep the status quo & keep non-recourse way open!
To be clear, "non recourse" means that if you walk away from the house, the lender cannot come after your other assets. It does NOT mean that your credit report will be clear. Until it falls off your credit report 7 years later, you'll have troubles renting, and any loans you get will likely be subprime (much higher rates). It's not a get-out-of-jail-free card, it's likely to be pretty painful.

I mean, don't get me wrong, my explicit plan when we bought our first bay-area house was that I'd rather keep enough non-housing assets that if everything went pear-shaped, we could walk away from the house and straight-up purchase a house in the upper midwest where I grew up. I would have hated having to take that option, but it was there.

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Re: Extra mortgage payments OR not

Post by grabiner » Wed Jul 29, 2020 11:40 pm

gurusw wrote:
Wed Jul 29, 2020 10:28 pm
grabiner wrote:
Wed Jul 29, 2020 10:36 am
The negative bond is the view I took. I set my asset allocation to 100% net stock when I bought a home in 2013; my bond allocation was equal to my mortgage balance. As retirement approached, I decreased the net stock allocation (and the gross stock allocation decreased more slowly since the mortgage was paid down). In 2020, I was 88% net stock. I paid off the mortgage in March, selling only bonds, to keep the same stock-market exposure at 88% stock.
I'm still trying to wrap my head around how do you do your AA calculations.

1. Let's say, you have 1 million portfolio to invest.
2. Your house value is also 1 million, and you have $500K equity in the house.
3. Your mortgage is $3K/month. $1K is towards principal and $2K is towards interest in the current month.
4. Effectively you want 60/40 allocation for your age.

Can you please explain how would you go on splitting and maintaining your assets?
In this situation, you have -$500K in your mortgage, so a net allocation of 60/40 would be $300K stock, $700K bonds, -$500K mortgage. If you paid off the mortgage by selling bonds, you would have $300K stock, $200K bonds, with the same risk level.

Now, I wouldn't recommend a 60/40 net allocation, whether you have the mortgage or not. The home isn't part of your investment portfolio, but the fact that you own an expensive home means that a lot of your retirement standard of living doesn't depend on your investments. Therefore, you can have a riskier net allocation when you own a home. (Similarly, you can have a riskier allocation if you have a pension or annuity, since a market decline won't affect the income from the pension or annuity. If you sell $200K in bonds to buy an annuity, you aren't changing your stock-market risk.)

When I bought the home, my net allocation was 100% stock, with more than the risk of 100% stock because I overweighted riskier stock. (For example, my similar 90%-stock portfolio lost over 60% top to bottom in the 2007-2009 decline, about the same decline as a 100%-stock portfolio.) I am one of the most aggressive investors on the Bogleheads forum, but even I didn't want to take that much risk until I owned the home. But if I had paid cash for the home, I would have changed my investments to be 100% stock when I bought the home. I didn't pay cash because I would have had to sell stock for a huge capital gain; instead, I sold enough stock for the down payment, and kept a bond allocation equal to the mortgage balance.
Wiki David Grabiner

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gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Wed Jul 29, 2020 11:57 pm

Thanks for responding, everyone!

If I go for conventional loan, do I need to pay down my current mortgage to $765K before refinancing; or can I pay $145K during refinancing to get conventional loan?

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Re: Extra mortgage payments OR not

Post by Outer Marker » Thu Jul 30, 2020 2:10 am

gurusw wrote:
Wed Jul 29, 2020 10:42 pm
. . . I'm worried that if this WFH trend catches up, the RE prices would start declining in bay area. So whether it's prudent to put $145K to reduce payments; or keep the status quo & keep non-recourse way open!

Also I'm not sure if BHs pay for kid's college, or not. So that would be another consideration before committing the monies.

Too much confusion. I am just venting out. Not sure whether there are right answers in this situation.
This "non recourse" issue is a red herring. Its an internet chat board, so occasionally you're going to get some nonsense opinions. Seriously, you're going to leverage your house to put all your money into bitcoin and emerging markets basket weaving companies on the theory that if does not work out you can declare bankruptcy and walk away from non-recourse debt? Of course not. You own your house, you owe the money. That the status quo. Getting a much lower interest mortgage loan and paying down the debt is going to put you in a better financial situation, period.

You can pay it down at the refi closing. Since the fed. cap on mortgage interest deductions is $750,000, reach into your emergency funds and come up with that last $15,000. See, https://www.irs.gov/publications/p936#: ... %2C%202017.

Apart from the mortgage, do some thinking and some reading about your asset allocation. That's a critically important issue for you to resolve. It could be worth millions down the road.

And, yes, many BH, including this one, pay for college, support their parents, etc. Money is not an end in and of itself!

exarkun
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Re: Extra mortgage payments OR not

Post by exarkun » Thu Jul 30, 2020 4:21 pm

ray.james wrote:
Tue Jul 28, 2020 11:53 pm
This is all the calculators and the description. https://www.mtgprofessor.com/calculators.htm
3f is here: https://www.mtgprofessor.com/calculator ... tor3f.html
Can anyone get the 3f calculator to work? I get

Code: Select all

500 - Internal server error.
There is a problem with the resource you are looking for, and it cannot be displayed.

Topic Author
gurusw
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Re: Extra mortgage payments OR not

Post by gurusw » Thu Jul 30, 2020 11:33 pm

exarkun wrote:
Thu Jul 30, 2020 4:21 pm
Can anyone get the 3f calculator to work? I get

Code: Select all

500 - Internal server error.
There is a problem with the resource you are looking for, and it cannot be displayed.
Works for me.

Topic Author
gurusw
Posts: 177
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Re: Extra mortgage payments OR not

Post by gurusw » Thu Jul 30, 2020 11:34 pm

Outer Marker wrote:
Thu Jul 30, 2020 2:10 am
This "non recourse" issue is a red herring. Its an internet chat board, so occasionally you're going to get some nonsense opinions. Seriously, you're going to leverage your house to put all your money into bitcoin and emerging markets basket weaving companies on the theory that if does not work out you can declare bankruptcy and walk away from non-recourse debt? Of course not. You own your house, you owe the money. That the status quo. Getting a much lower interest mortgage loan and paying down the debt is going to put you in a better financial situation, period.

You can pay it down at the refi closing. Since the fed. cap on mortgage interest deductions is $750,000, reach into your emergency funds and come up with that last $15,000. See, https://www.irs.gov/publications/p936#: ... %2C%202017.

Apart from the mortgage, do some thinking and some reading about your asset allocation. That's a critically important issue for you to resolve. It could be worth millions down the road.

And, yes, many BH, including this one, pay for college, support their parents, etc. Money is not an end in and of itself!
Thanks a lot for your support :)

exarkun
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Re: Extra mortgage payments OR not

Post by exarkun » Fri Jul 31, 2020 8:26 am

gurusw wrote:
Thu Jul 30, 2020 11:33 pm
exarkun wrote:
Thu Jul 30, 2020 4:21 pm
Can anyone get the 3f calculator to work? I get

Code: Select all

500 - Internal server error.
There is a problem with the resource you are looking for, and it cannot be displayed.
Works for me.
By work, do you mean the page loads or you can actually use the calculator? The page loads for me, but when I enter any numbers and submit (or submit with no numbers) I get the aforementioned error...

Thanks

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