I agree that Investing is better than paying off mortage but.....

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bg5
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I agree that Investing is better than paying off mortage but.....

Post by bg5 » Wed Jul 29, 2020 7:56 am

Ladies and Gents,

I agree from a math perspective its makes sense to continue to invest money in the market vs paying off my 30 year 3.0% mortgage but I need help as to when I should fully pay off my mortgage and where this money would come from.

A few things to understand about our situation...

1. Ages 39 and 35 - Both of us are teachers and will receive pensions and we will be able to easily live off of our pensions alone. This includes all hobbies, travel etc. I will retire in 14 years and wife will retire in 18 years.

2. We have about 300K as of now in retirement accounts and most of this is in a 457b which does allow us to withdraw prior to 59 1/2 if we retire. The other money is in Roth IRA and 403b. We currently invest about $35,000 annually to these accounts

3. We owe $165,000 on a home valued at $350,000 and we have a 30 year mortgage that we just started at 3% interest.

4. We have about $50,000 in cash and our combined income is around $150,000 and we live in a very low cost area. WE have no debt other than our home and our current mortage is about $1000 a month. We can easily save about $2500 each month after we contribute to retirement, have fun, vacation etc.

5. We have 3 kids ages 12, 8, and 1 and have around $20k in 529 plans. We plan to fully fund the first 2 at local state univ and can easily cash flow this as we will continue to get 2% raises for life as we are in very stable school district. The last child will use the 529 and we can pull out from other accunts when the time comes.

6. We hope to leave most of our retirement cash to the kids some day because our pension and SS will allow us to live a really great life in retirement.

Paying off mortage is not necessary for us to retire as it appears our pensions alone will allow us to easily be able to do the things we want in retirement. Our state also allows us to collect SS when the time comes. But we prefer to have house paid off just to keep things easier.

Option 1 = continue to invest like crazy now and pay off mortage when we retire using Roth IRA or 457B.

Option 2 = pay off around $10,000 each year off of principal so we continue to knock down mortage and this would probably allow us to pay off house in less than 10 years.

Option 3 = make minimum payments for next 30 years since we can easily save $2500-$3000 each month after travel, fun etc......and invest like crazy. Our pension estimator shows us we will take home alot more in retirement that we do now. When SS kicks in we will be killing it.

Option 4 - anything you suggest.

So when do we pay the rest off? Do we ever? Please advise

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Re: I agree that Investing is better than paying off mortage but.....

Post by Jack FFR1846 » Wed Jul 29, 2020 8:08 am

It comes down to what YOU want to do. The 2 opposing views:

Dave Ramsey: "A mortgage is debt. You'd be an idiot not to pay that down as soon as possible".

Ric Edelman: "Money is cheap right now and over time, with raises, it becomes even cheaper. You'd be an idiot to pay any extra towards the mortgage".

Take your pick.

(I paid off my mortgage decades ago)
Bogle: Smart Beta is stupid

CoAndy
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Re: I agree that Investing is better than paying off mortage but.....

Post by CoAndy » Wed Jul 29, 2020 8:15 am

Provided you are maxing out your tax deferred space, I would start paying off the house.

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simplesimon
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Re: I agree that Investing is better than paying off mortage but.....

Post by simplesimon » Wed Jul 29, 2020 8:15 am

Doing anything "like crazy" (both spending and saving) for an extended period is not sustainable.

If you plan to retire in 14-18 years, why not refinance to a 15-year mortgage?

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Re: I agree that Investing is better than paying off mortage but.....

Post by niceguy7376 » Wed Jul 29, 2020 8:16 am

All depends on "Do I care how much interest i am paying over 30 years".

Based on that answer, look at the below link
https://www.mortgagecalculators.info/ca ... ourresults

See the total interest that you will pay If you just pay the minimum of 1K to mortgage and let the loan run 30 years Vs pay a bit more every month(whatever that amount is) . Then make your decision accordingly.

Your first kid goes to school in 5 years. Maybe pay more those first 5 years and then you cash flow their college and then you will have the next kid in line for another 4 years.

petulant
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Re: I agree that Investing is better than paying off mortage but.....

Post by petulant » Wed Jul 29, 2020 8:18 am

Will you also collect social security, or are you exempt from social security? In some states teachers are exempt, and in some states they participate. Your answer is material.

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bg5
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Re: I agree that Investing is better than paying off mortage but.....

Post by bg5 » Wed Jul 29, 2020 8:24 am

I am allowed to collect both a pension and SS as I teach in MIchigan

zie
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Re: I agree that Investing is better than paying off mortage but.....

Post by zie » Wed Jul 29, 2020 8:27 am

Are you paying PMI? If so, I'd definitely pay off enough at the minimum to get rid of PMI. I'm guessing you are not, based on LTV, but it never hurts to double check.

If your investments make more than your interest, there is no hurry to pay it off. If/when that stops being true, then taking that guaranteed 3% earnings by paying off the mortgage is a no brainer.

If you are going to hold off on paying it off, then I'd suggest calculate paying it off a year or three before you plan on retiring, and send in the extra payments. Just so you don't have to bother with it after retiring and you get it done before any health problems down the road.

I agree for you it probably doesn't matter much when you pay it off.

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Meaty
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Re: I agree that Investing is better than paying off mortage but.....

Post by Meaty » Wed Jul 29, 2020 8:30 am

bg5 wrote:
Wed Jul 29, 2020 7:56 am
Ladies and Gents,

I agree from a math perspective its makes sense to continue to invest money in the market vs paying off my 30 year 3.0% mortgage but I need help as to when I should fully pay off my mortgage and where this money would come from.

A few things to understand about our situation...

1. Ages 39 and 35 - Both of us are teachers and will receive pensions and we will be able to easily live off of our pensions alone. This includes all hobbies, travel etc. I will retire in 14 years and wife will retire in 18 years.

2. We have about 300K as of now in retirement accounts and most of this is in a 457b which does allow us to withdraw prior to 59 1/2 if we retire. The other money is in Roth IRA and 403b. We currently invest about $35,000 annually to these accounts

3. We owe $165,000 on a home valued at $350,000 and we have a 30 year mortgage that we just started at 3% interest.

4. We have about $50,000 in cash and our combined income is around $150,000 and we live in a very low cost area. WE have no debt other than our home and our current mortage is about $1000 a month. We can easily save about $2500 each month after we contribute to retirement, have fun, vacation etc.

5. We have 3 kids ages 12, 8, and 1 and have around $20k in 529 plans. We plan to fully fund the first 2 at local state univ and can easily cash flow this as we will continue to get 2% raises for life as we are in very stable school district. The last child will use the 529 and we can pull out from other accunts when the time comes.

6. We hope to leave most of our retirement cash to the kids some day because our pension and SS will allow us to live a really great life in retirement.

Paying off mortage is not necessary for us to retire as it appears our pensions alone will allow us to easily be able to do the things we want in retirement. Our state also allows us to collect SS when the time comes. But we prefer to have house paid off just to keep things easier.

Option 1 = continue to invest like crazy now and pay off mortage when we retire using Roth IRA or 457B.

Option 2 = pay off around $10,000 each year off of principal so we continue to knock down mortage and this would probably allow us to pay off house in less than 10 years.

Option 3 = make minimum payments for next 30 years since we can easily save $2500-$3000 each month after travel, fun etc......and invest like crazy. Our pension estimator shows us we will take home alot more in retirement that we do now. When SS kicks in we will be killing it.

Option 4 - anything you suggest.

So when do we pay the rest off? Do we ever? Please advise
Assuming you have no interruptions in income, investing likely yields a better nominal outcome. The cons are - what if you get laid off? That cash flow problem could require you to withdraw investments at a loss. Second, investing isn’t equal on a risk adjusted basis. You are getting a guaranteed return when you payoff your mortgage; no guarantee exists on the investment side (outside of annuities, CDs, etc which all have a lower return than a 3% mortgage)

I paid mine off. It was a great decision
"Discipline equals Freedom" - Jocko Willink

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bg5
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Re: I agree that Investing is better than paying off mortage but.....

Post by bg5 » Wed Jul 29, 2020 8:49 am

Assuming I am going to pay it off early prior to retirement should I just pay off the principal each month or should I wait until I get closer to retirement and use my 457b and pay off the majority in one lump sum?

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Watty
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Re: I agree that Investing is better than paying off mortage but.....

Post by Watty » Wed Jul 29, 2020 8:55 am

bg5 wrote:
Wed Jul 29, 2020 7:56 am
We have about $50,000 in cash....We can easily save about $2500 each month ....

Option 4 - anything you suggest.
With three kids and only six years until college costs start you really need to keep that $50K in cash for emergencies and unexpected expenses.

You are making a lot of assumptions about your jobs being secure and there not being any changes to your pension plans but while things look great there is still a lot that can go wrong with your jobs, pensions, investments, and your health. There is a very real risk that things might not work out like you are planning.

I would just save up that $2500 a month for the next year and then decide what to do with it when you have $30K saved up. A year from now what to do with the money might be a lot clearer.

One option then would be to call your lender and ask if they will "recast your mortgage"(Google this). They are not required to do this but they usually will for a few hundred dollar fee or even for free. The way this works is that if you pay down your mortgage by by 20%(or whatever makes sense) then your required mortgage payment would be reduced by the same percentage. The interest rate and length of the loan would stay the same. That would be important if something happens like you are laid off or interest rates go up a lot. Having the lower mortgage payment could also be handy when your kids are in college.

bg5 wrote:
Wed Jul 29, 2020 7:56 am
I agree from a math perspective its makes sense to continue to invest money in the market vs paying off my 30 year 3.0% mortgage....
The math is complex and your options will have different risk factors so what what is best is not clear cut at all.

One thing to remember is that if your normal asset allocation is 30% bonds then you need to do the math comparing the mortgage to investments that have your normal asset allocation. If you had a paid off house and got a new $100K mortgage at 3% then invested the money you would be buying $30K in bonds that pay around 1%. That makes it harder to come out ahead.

You also need to keep in mind that mathematically you might come out ahead on average but there will be a chance that it will turn out badly because you have a sequence of returns risk. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.

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djpeteski
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Re: I agree that Investing is better than paying off mortage but.....

Post by djpeteski » Wed Jul 29, 2020 9:03 am

The bottom line is that either choice is good, and your general behavior in personal finance is excellent. So really do whatever you wish with the input from your spouse. What will make the two of you happiest, and then do that.

You might be far better off withdrawing money now, from investment accounts, and paying off the mortgage. Or you might be far better off to pay minimal amounts on your mortgage and invest all you can. But know one knows. History, at these rates, would show the second option is best but no one knows what will happen in the next 6 months let alone 30 years.

Do do what will make you two happy, you are already killing it.

I'd vote for paying off the mortgage. It gives you great downside protection.

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Re: I agree that Investing is better than paying off mortage but.....

Post by Triple digit golfer » Wed Jul 29, 2020 9:08 am

I am generally conservative, so I am keeping my 2.99% mortgage and investing any extra money into a taxable account. I enjoy seeing my available balances grow. It allows me to sleep at night knowing that we have money available if needed. However, we are a one income household and I work in a corporate job. The income of two teachers is far more certain than the income of one corporate job.

Even invested at my 80/20 AA, over 20+ years I am very likely to outperform a 2.99% rate.

Ten years down the road, let's say the market has been booming and has returned 10% a year. Nobody says I can't take some money out then and pay down or pay off the mortgage at that time.

Nobody says you can't simply split the difference and put half of your extra toward your mortgage and half into investments.

DaftInvestor
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Re: I agree that Investing is better than paying off mortage but.....

Post by DaftInvestor » Wed Jul 29, 2020 9:13 am

How are you so confident you will get 2% increases for life? That can't be baked into your contract - contracts can change.
My parents both thought they taught "in a very stable school district" - and then during an economic downtown when contracts where being re-negotiated (and after they returned from being out on strike with no income for a while) the raises went away and as things got worse one of my parents was laid off. Be sure to plan for the unexpected.
That said - if I was in your shoes - I would simply make larger payments over the next decade such that your loan is paid off before you retire (it just feels better to retire without a mortgage). If you can get better terms by converting to a 15-year mortgage - do that. Otherwise just calculate what payments you should be making to pay it off in 12 years. At least that's what I would do.

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Re: I agree that Investing is better than paying off mortage but.....

Post by petulant » Wed Jul 29, 2020 9:20 am

bg5 wrote:
Wed Jul 29, 2020 8:24 am
I am allowed to collect both a pension and SS as I teach in MIchigan
I am concerned that if you actually collect two pensions and social security, you will be paying a lot of federal taxes. So saving in a tax-deferred plan like a 457(b) or 403(b) will not result in traditional arbitrage benefits: you may save at the 22% rate today but ultimately pay the same or more. For example, if your pensions pay at 60% of salary, you might have $90,000 in annual income right there. Further, in say 15 years the (300K-35K) in tax-deferred accounts could grow to $412,000 using just a 3% real return. If you make regular withdrawals using SEPP or Roth conversions using the 4% rule, you'll have $16000 or so in additional income, filling up the 12% federal bracket completely for more or less the rest of your life. So each additional dollar you save in tax-deferred accounts might save 22% today just to turn around and pay 25% if the tax brackets revert.

Because of that, there is much less benefit to packing additional money in the 403(b) and 457(b), especially if you have any bond allocation there. You would just be saving in an asset earning, say, 1% while carrying debt costing you, say, 3%. The only benefit comes if you want to take on the additional risk to invest in stocks there. But note, at that point you're basically borrowing on the mortgage to buy stocks, since you will not have a huge tax benefit.

Since it is likely you have bonds in your asset allocation and you do not get huge benefits from tax changes, I support option 4. It might make sense to stop all traditional retirement contributions, identify a comfortable level of new Roth contributions, and use the rest of the savings to pay down the mortgage. You would combine that with reducing the bond allocation in retirement accounts over time.

zie
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Re: I agree that Investing is better than paying off mortage but.....

Post by zie » Wed Jul 29, 2020 9:25 am

bg5 wrote:
Wed Jul 29, 2020 8:49 am
Assuming I am going to pay it off early prior to retirement should I just pay off the principal each month or should I wait until I get closer to retirement and use my 457b and pay off the majority in one lump sum?
You would probably be better off taking a percentage(or all of) of your taxable investment additions and applying that to your mortgage and paying it off over time. That way you get to lower your interest expense over time.

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anon_investor
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Re: I agree that Investing is better than paying off mortage but.....

Post by anon_investor » Wed Jul 29, 2020 9:41 am

bg5 wrote:
Wed Jul 29, 2020 7:56 am
Option 3 = make minimum payments for next 30 years since we can easily save $2500-$3000 each month after travel, fun etc......and invest like crazy. Our pension estimator shows us we will take home alot more in retirement that we do now. When SS kicks in we will be killing it.

Option 4 - anything you suggest.
It may make sense to start off with Option 3. I would suggest building up non-retirement assets (i.e. taxable account, cash savings, etc.). Then at a certain point where you have a good amount, you can reevaluate and pay extra towards your mortgage every month, or sell your taxable investments to pay off your mortgage, or continue to pay the minimum and save the rest.

Another option is to try to refinance your mortgage to a 15 year one at a lower rate at no cost. In the refinance mega thread people have been reporting 15 year fixed no cost refis at 2.25%-2.5%:
viewtopic.php?f=2&t=289559

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Re: I agree that Investing is better than paying off mortage but.....

Post by Tal- » Wed Jul 29, 2020 9:57 am

You've got good advice up above - but that's never stopped me from weighing in... :)

First - you really are doing great. Props.

Second - financially speaking, it's hard to go wrong with either option here.

Third - My personal philosophy is that you should save/invest the money for now, and then ask the question again when you have $160K in extra money sitting around. Making extra payments on a 3.0% mortgage doesn't buy you the cashflow flexibility of paying it off entirely, nor the expected returns of investing the money. So, I'd punt on the decision, keep saving aggressively, knowing that you're doing well in the interim and can make the big $160K decision with more information available.
Debt is to personal finance as a knife is to cooking.

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bg5
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Re: I agree that Investing is better than paying off mortage but.....

Post by bg5 » Wed Jul 29, 2020 10:07 am

Great feedback from everyone and that is why I love this site.

Some things really stood out after reading everyones advice...

1. Since my wife and I can both collect pensions and SS our retirement income will be extremely high without even touching our retirement accounts so pre tax savings might not be a huge savings after all. We should def continue to max out our Roth IRA each year no matter what.

2. Paying extra off the principal is a guaranteed return no matter what and debt elimination of any kind is a positive

I talked to the wife and I think we plan to do the following....

1. Continue to both max out our Roth IRA each year - $12,000 combined

2. Use our 457b and 403b to save an additional $20,000 each year since we are already used to doing this

3. Since we can save an additional $2500 each month pretty easily we should put that in a taxable account and allow it to grow. Currently all of our investments are in VTSAX. As that money continues to grow at some point prior to retirement we can pay off in full our mortage if we choose. This extra savings will also add security and piece of mind.

4. Keep the $50,000 we have in savings as an emergency fund since we still have kids aged 12, 8 and 1. Some of this money could be used to pay off mortagae or for college but it allows additional security in these crazy times.

So we want to pay off mortgage prior to retirement but it does not have to be done right now or monthly. We can allow our addional $2500 each month to hopefully grow in a taxable account.

Hope that sounds like a decent plan to most

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Re: I agree that Investing is better than paying off mortage but.....

Post by bloom2708 » Wed Jul 29, 2020 10:09 am

My only 2 thoughts:

Cash flowing college might be harder than it seems. The dorm years are $15k to $20k now total. Slightly less when they live off campus. That will certainly go up.

I would plan to save more in 529s/college funds. We have 3 kids. Each had about $100k. It will cover a good chunk but not all.

For the house, I would plan to pay it off by the time you retire. However you do that. Bits and pieces, lumps. $165k is very doable.

Once we got ours below $100k in the mid 2000s it went very fast. Paid it off summer 2007. Haven't had any urge to get another mortgage.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

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Re: I agree that Investing is better than paying off mortage but.....

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

niceguy7376 wrote:
Wed Jul 29, 2020 8:16 am
All depends on "Do I care how much interest i am paying over 30 years".

Based on that answer, look at the below link
https://www.mortgagecalculators.info/ca ... ourresults

See the total interest that you will pay If you just pay the minimum of 1K to mortgage and let the loan run 30 years Vs pay a bit more every month(whatever that amount is) . Then make your decision accordingly.
This type of calculator shows the benefits of extra payments, but ignores the costs. That is appropriate if the choice is to spend the money now, or use it to pay down the mortgage and spend more money later. But if you would instead be investing the money, then paying down the mortgage costs you whatever you would get from the investments.

A more fair comparison is discussed on the wiki: Paying down loans versus investing If you buy low-risk bonds with the same duration as your mortgage prepayment, you don't change your risk level significantly compared to paying down the mortgage, and your net gain or loss is the difference in rates. You can weigh that difference against any other benefits from investing the money.

Paying down a 30-year mortgage is a very-long-term investment, with a 3% risk-free return (unless you donate a lot to charity, you don't itemize deductions). Investing in Vanguard Long-Term Bond Index in an IRA offers a 2.18% low-risk long-term return. The 0.82% difference is probably not worth paying down the mortgage, because of the permanent benefit of tax-deferral (even after the mortgage is gone), and the options lost. If you buy bonds and bond yields are 4% three years from now, you will happily earn 4% on your bonds while paying 3% on your mortgage; if you pay down your mortgage, you cannot re-borrow at 3% to buy 4% bonds.

But if you are maxing out your IRA, 457, and 529, and don't have a need for liquidity, then paying down the mortgage is probably better than investing. If you are in the 22% tax bracket and hold the same bond fund in your taxable account, your return is only 1.60%, and you don't get any permanent tax-deferral benefit.
Wiki David Grabiner

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anon_investor
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Re: I agree that Investing is better than paying off mortage but.....

Post by anon_investor » Wed Jul 29, 2020 10:16 am

bg5 wrote:
Wed Jul 29, 2020 10:07 am
Great feedback from everyone and that is why I love this site.

Some things really stood out after reading everyones advice...

1. Since my wife and I can both collect pensions and SS our retirement income will be extremely high without even touching our retirement accounts so pre tax savings might not be a huge savings after all. We should def continue to max out our Roth IRA each year no matter what.

2. Paying extra off the principal is a guaranteed return no matter what and debt elimination of any kind is a positive

I talked to the wife and I think we plan to do the following....

1. Continue to both max out our Roth IRA each year - $12,000 combined

2. Use our 457b and 403b to save an additional $20,000 each year since we are already used to doing this

3. Since we can save an additional $2500 each month pretty easily we should put that in a taxable account and allow it to grow. Currently all of our investments are in VTSAX. As that money continues to grow at some point prior to retirement we can pay off in full our mortage if we choose. This extra savings will also add security and piece of mind.

4. Keep the $50,000 we have in savings as an emergency fund since we still have kids aged 12, 8 and 1. Some of this money could be used to pay off mortagae or for college but it allows additional security in these crazy times.

So we want to pay off mortgage prior to retirement but it does not have to be done right now or monthly. We can allow our addional $2500 each month to hopefully grow in a taxable account.

Hope that sounds like a decent plan to most
Do you have Roth 457b or Roth 403b options? Since you both have pensions and will have social security, it may make sense to run the numbers and see if Roth makes more sense than traditional (or at least a portion of it).

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Re: I agree that Investing is better than paying off mortage but.....

Post by LittleMaggieMae » Wed Jul 29, 2020 10:25 am

bg5 wrote:
Wed Jul 29, 2020 8:49 am
Assuming I am going to pay it off early prior to retirement should I just pay off the principal each month or should I wait until I get closer to retirement and use my 457b and pay off the majority in one lump sum?
Paying down the principle early in the mortgage saves on interest. You can find a mortgage amortization schedule online OR if you have excel there's a mortgage loan template (I think even the free spreadsheet apps have a mortgage loan amortization schedule template... heck there might even be one in the bogleheads wiki... )

If you want to save money (pay less for your mortgage) then you should pay down principle as you go along (early in the mortgage). If you just want to be "debt free" - pay off the mortgage in full when you accumulate enough money to do so (which might be some time during the last decade of the mortgage - which means you aren't saving much in interest).

What's more important to you - saving money OR being "debt free"??

FYI: I don't really see or feel the warm fuzzy of having a paid off house - especially when the mortgage payment isn't burdensome. Even after you own the house - you'll still need to 'save' up to pay property taxes and insurance. you'll still need to have money to maintain the house (if you can't maintain the house - it loses value... think a leaking roof or a broken pipe or a just all around "no maintenance" done for a decade or more... you don't get top dollar for that kind of house when you go to sell. ) I do get a little bit of "warm fuzzy" from NOT paying so much for mortgage - so I do pay down my mortgage as I go along - especially when I have extra $$ after funding all my other "more important than the mortgage" expenses/goals (including retirement savings). I'd rather cut a few years off the end of the mortgage (save interest) during the early years of the mortgage and as I go along than worry about how I'm gonna come up with 50K or 100K at some point in the future to pay off the mortgage in full.

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Re: I agree that Investing is better than paying off mortage but.....

Post by hightower » Wed Jul 29, 2020 1:36 pm

bg5 wrote:
Wed Jul 29, 2020 7:56 am
Ladies and Gents,

I agree from a math perspective its makes sense to continue to invest money in the market vs paying off my 30 year 3.0% mortgage but I need help as to when I should fully pay off my mortgage and where this money would come from.

A few things to understand about our situation...

1. Ages 39 and 35 - Both of us are teachers and will receive pensions and we will be able to easily live off of our pensions alone. This includes all hobbies, travel etc. I will retire in 14 years and wife will retire in 18 years.

2. We have about 300K as of now in retirement accounts and most of this is in a 457b which does allow us to withdraw prior to 59 1/2 if we retire. The other money is in Roth IRA and 403b. We currently invest about $35,000 annually to these accounts

3. We owe $165,000 on a home valued at $350,000 and we have a 30 year mortgage that we just started at 3% interest.

4. We have about $50,000 in cash and our combined income is around $150,000 and we live in a very low cost area. WE have no debt other than our home and our current mortage is about $1000 a month. We can easily save about $2500 each month after we contribute to retirement, have fun, vacation etc.

5. We have 3 kids ages 12, 8, and 1 and have around $20k in 529 plans. We plan to fully fund the first 2 at local state univ and can easily cash flow this as we will continue to get 2% raises for life as we are in very stable school district. The last child will use the 529 and we can pull out from other accunts when the time comes.

6. We hope to leave most of our retirement cash to the kids some day because our pension and SS will allow us to live a really great life in retirement.

Paying off mortage is not necessary for us to retire as it appears our pensions alone will allow us to easily be able to do the things we want in retirement. Our state also allows us to collect SS when the time comes. But we prefer to have house paid off just to keep things easier.

Option 1 = continue to invest like crazy now and pay off mortage when we retire using Roth IRA or 457B.

Option 2 = pay off around $10,000 each year off of principal so we continue to knock down mortage and this would probably allow us to pay off house in less than 10 years.

Option 3 = make minimum payments for next 30 years since we can easily save $2500-$3000 each month after travel, fun etc......and invest like crazy. Our pension estimator shows us we will take home alot more in retirement that we do now. When SS kicks in we will be killing it.

Option 4 - anything you suggest.

So when do we pay the rest off? Do we ever? Please advise
As anyone can see from the variety of responses here, it really comes down to being a personal choice. None of your options are bad. I will say that if you know you're staying put in that house for the long haul, it makes sense to pay it off simply so you're not paying all that interest. There's no guarantee you'll get any returns at all in the stock market, but there's definitely a guarantee you'll save money on interest/finance charges by paying it off early. If you think you'll want to move again, I'd probably pay it off slowly with the 30 year mortgage and let the bank's money stay invested in it instead of yours.
Otherwise, you two are doing great for your age and profession. Congrats!

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Re: I agree that Investing is better than paying off mortage but.....

Post by TheDDC » Wed Jul 29, 2020 8:30 pm

I would count on the pension (don't listen to naysayers) as that is protected by contract, but the COLA is not earned until you retire. That could easily be taken away.

Pay off the mortgage hard and fast. That is a guaranteed income you will free up by not sending it to the bank.

I would not fund 529s until the mortgage is paid off.

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Re: I agree that Investing is better than paying off mortage but.....

Post by Bama12 » Wed Jul 29, 2020 8:34 pm

I do both but Investing comes first.

I max out my 401k, Roth, and have a little play money. My insert rate on my mortgage is 2.75%.

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Re: I agree that Investing is better than paying off mortage but.....

Post by RootSki » Wed Jul 29, 2020 8:46 pm

Living mortgage & debt free reduces a lot of stress and worry. It’s allows us to both front load our 401k’s and make IRA contributions on 1/1.

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Re: I agree that Investing is better than paying off mortage but.....

Post by nisiprius » Wed Jul 29, 2020 9:08 pm

Image

There are analyses that suggest that paying off the mortgage is suboptimum, but I don't buy them. For one thing, if the analysis is being made by an advisory service that sells investments (e.g. Ric Edelman) there is an obvious conflict of interest--they don't want you to send your money to a bank to pay down a mortgage, they want you to send it to them to manage.

The analyses typically leave out risk--that is to say, they do not account for the fact that the bleeding of money from mortgage payments is steady and dead certain, whereas the positive return on your stock investments is irregular and "maybe." I think Nassim Nicholas Taleb would agree that the situation with the high mortgage balance and the big stock portfolio is more fragile than the the low balance and smaller portfolio.

That's a real boulder, by the way, and I've seen it in real life a couple of times; it's part of the Babson Boulder Trail near Gloucester, MA. I once Photoshopped one that said "Keep in hock up to your eyeballs" but I don't think anyone has really carved that in stone yet. If people honestly believe it, someone really should.

Paid off our mortgage in 1998, several years early due to extra payments along the way, and I have never had a moment's regret. "I don't have to meet that payment any more" feels much better than "I have enough money to meet that payment this month."

Ultimately, it's your money and you should deploy it in the way that is most satisfying to you. Deciding to pay off the mortgage puts you in good company--it doesn't make you a weird outlier.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: I agree that Investing is better than paying off mortage but.....

Post by randomguy » Wed Jul 29, 2020 9:46 pm

LittleMaggieMae wrote:
Wed Jul 29, 2020 10:25 am

What's more important to you - saving money OR being "debt free"??
Neither:). I care about how much money I have in 20+ years. If in 20+ years you have 1.5 million versus say 1.0 million, do you care if you paid 50k of interest or 500k? I sure don't.


Personally I would be investing. There is something very comforting about having a bit pile of cash that helps you sleep well at night.

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Re: I agree that Investing is better than paying off mortage but.....

Post by bg5 » Thu Jul 30, 2020 3:40 pm

I guess your right.....maybe I invest all of it

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 3:45 pm

Even though I'm an aggressive investor, I'm very glad that our mortgage is paid off. We got a 3.375% guaranteed, after-tax return for doing so; reduced our need for liquidity; reduced our risk profile; and improved our cash flow significantly.
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Re: I agree that Investing is better than paying off mortage but.....

Post by rascott » Thu Jul 30, 2020 3:46 pm

Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient. Borrowing at 3% to loan out at 1.5% isn't a path to building wealth.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 3:48 pm

rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
Last edited by willthrill81 on Thu Jul 30, 2020 3:50 pm, edited 1 time in total.
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Re: I agree that Investing is better than paying off mortage but.....

Post by rascott » Thu Jul 30, 2020 3:48 pm

willthrill81 wrote:
Thu Jul 30, 2020 3:45 pm
Even though I'm an aggressive investor, I'm very glad that our mortgage is paid off. We got a 3.375% guaranteed, after-tax return for doing so; reduced our need for liquidity; reduced our risk profile; and improved our cash flow significantly.
Except today's hurdle rate is only about 2.5%

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Re: I agree that Investing is better than paying off mortage but.....

Post by rascott » Thu Jul 30, 2020 3:50 pm

willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.
And two tenured teachers are unlikely to have major liquidity issues, assuming proper insurance is in place.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 3:51 pm

rascott wrote:
Thu Jul 30, 2020 3:48 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:45 pm
Even though I'm an aggressive investor, I'm very glad that our mortgage is paid off. We got a 3.375% guaranteed, after-tax return for doing so; reduced our need for liquidity; reduced our risk profile; and improved our cash flow significantly.
Except today's hurdle rate is only about 2.5%
For a 30 year? Clark Howard said last week that 30 year mortgages were averaging about 2.94%, IIRC. But yes, you can definitely get a 15 year for 2.5%.

Even so, 2.5% post-tax beats 1.2% pre-tax quite handily.
“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: I agree that Investing is better than paying off mortage but.....

Post by rascott » Thu Jul 30, 2020 3:53 pm

willthrill81 wrote:
Thu Jul 30, 2020 3:51 pm
rascott wrote:
Thu Jul 30, 2020 3:48 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:45 pm
Even though I'm an aggressive investor, I'm very glad that our mortgage is paid off. We got a 3.375% guaranteed, after-tax return for doing so; reduced our need for liquidity; reduced our risk profile; and improved our cash flow significantly.
Except today's hurdle rate is only about 2.5%
For a 30 year? Clark Howard said last week that 30 year mortgages were averaging about 2.94%, IIRC.

Even so, 2.5% post-tax beats 1.2% pre-tax quite handily.

Yep just locked a basically free one today at that.

2.25% ish if you want a 15 yr.

But yes, your point of the risk free comparison is totally valid.

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Re: I agree that Investing is better than paying off mortage but.....

Post by CT-Scott » Thu Jul 30, 2020 5:24 pm

I'm a bit late to this thread. I'm disappointed, but not surprised, that no one who is in favor you paying down your mortgage asked you whether you see yourself retiring in that house, or even whether you saw yourself still being there 10 years or 5 years from now.

Maybe I'm odd, but I'm shy of 50 and about to close on my 5th house. And I think there's a decent possibility that it might not be my last house. If you're fairly certain that this won't be your retirement house, why would you want to lock your money up in it's equity? The housing market could crash around the time you're looking to sell and you'd have lost much of that money. If you're in a no-recourse state, there's even more reason not to do that. And at today's interest rates, that mortgage payment is cheap. With as much equity as you currently estimate, I'd be more inclined to do a cash-out refi.

But if you *are* pretty confident that your current house is your last house, then I can see some value in paying it off early. I personally still would opt for a refi to tick the rate lower, push it out another 30 years, realize some monthly savings that you could reinvest, and just look at the mortgage payment as any other bill you can't avoid paying forever, like your property tax, insurance, internet/TV, etc.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 5:37 pm

CT-Scott wrote:
Thu Jul 30, 2020 5:24 pm
I'm a bit late to this thread. I'm disappointed, but not surprised, that no one who is in favor you paying down your mortgage asked you whether you see yourself retiring in that house, or even whether you saw yourself still being there 10 years or 5 years from now.
Because it's irrelevant. The closing costs are paid when the mortgage is taken out. How long you remain in the home after that doesn't really change anything.
“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: I agree that Investing is better than paying off mortage but.....

Post by CT-Scott » Thu Jul 30, 2020 5:55 pm

willthrill81 wrote:
Thu Jul 30, 2020 5:37 pm
CT-Scott wrote:
Thu Jul 30, 2020 5:24 pm
I'm a bit late to this thread. I'm disappointed, but not surprised, that no one who is in favor you paying down your mortgage asked you whether you see yourself retiring in that house, or even whether you saw yourself still being there 10 years or 5 years from now.
Because it's irrelevant. The closing costs are paid when the mortgage is taken out. How long you remain in the home after that doesn't really change anything.
I'm not talking about closing costs. I'm talking about paying $x more per month towards a low-rate mortgage vs investing that money in stonks long-term. OP can easily recast a 2.75% 30-year mortgage today and have quite a bit of extra cashflow each month that they could invest somewhere else which is likely to pay better than 2.75%.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 6:31 pm

CT-Scott wrote:
Thu Jul 30, 2020 5:55 pm
willthrill81 wrote:
Thu Jul 30, 2020 5:37 pm
CT-Scott wrote:
Thu Jul 30, 2020 5:24 pm
I'm a bit late to this thread. I'm disappointed, but not surprised, that no one who is in favor you paying down your mortgage asked you whether you see yourself retiring in that house, or even whether you saw yourself still being there 10 years or 5 years from now.
Because it's irrelevant. The closing costs are paid when the mortgage is taken out. How long you remain in the home after that doesn't really change anything.
I'm not talking about closing costs. I'm talking about paying $x more per month towards a low-rate mortgage vs investing that money in stonks long-term. OP can easily recast a 2.75% 30-year mortgage today and have quite a bit of extra cashflow each month that they could invest somewhere else which is likely to pay better than 2.75%.
Yes, stocks are likely to beat a 2.75% mortgage over the long-term. That argument also applies to bonds. Are you recommending 100% stock?
“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: I agree that Investing is better than paying off mortage but.....

Post by bg5 » Thu Jul 30, 2020 7:06 pm

Man....this forum is great but now i cannot figure out what to do. Our current house payment is $1086....once we pay it off my taxes would be $330 a month so basically once I pay off the house I free up an additional $740 a month.

But as others have pointed out investing all that cash each month can most likely beat that in the long run. I reality is with both of us getting pensions and SS most of this cash will be given to our kids and hopefully grand kids someday so I feel like we have a good 20-30 years before we even tap into that cash

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Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Thu Jul 30, 2020 7:19 pm

willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 7:49 pm

Admiral wrote:
Thu Jul 30, 2020 7:19 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?
I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
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Re: I agree that Investing is better than paying off mortage but.....

Post by grabiner » Thu Jul 30, 2020 8:14 pm

CT-Scott wrote:
Thu Jul 30, 2020 5:24 pm
I'm a bit late to this thread. I'm disappointed, but not surprised, that no one who is in favor you paying down your mortgage asked you whether you see yourself retiring in that house, or even whether you saw yourself still being there 10 years or 5 years from now.

Maybe I'm odd, but I'm shy of 50 and about to close on my 5th house. And I think there's a decent possibility that it might not be my last house. If you're fairly certain that this won't be your retirement house, why would you want to lock your money up in it's equity? The housing market could crash around the time you're looking to sell and you'd have lost much of that money. If you're in a no-recourse state, there's even more reason not to do that. And at today's interest rates, that mortgage payment is cheap. With as much equity as you currently estimate, I'd be more inclined to do a cash-out refi.
The math goes the other way; it is more attractive to make a prepayment on a home if you don't intend to stay there forever.

If you have 20 years left on your 3% mortgage, paying down the mortgage is equivalent to buying a 20-year bond yielding 3%, as you won't get any benefit until the mortgage is paid off. If you have 5 years left because you plan to sell the house in 5 years, it is equivalent to buying a 5-year bond, as you get the prepayment back with interest when you sell.

In addition, if you plan to stay in the home a long time, it is more likely that you will refinance; making prepayments reduces the benefit of refinancing.
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Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Thu Jul 30, 2020 8:21 pm

willthrill81 wrote:
Thu Jul 30, 2020 7:49 pm
Admiral wrote:
Thu Jul 30, 2020 7:19 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?
I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.

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Re: I agree that Investing is better than paying off mortage but.....

Post by grabiner » Thu Jul 30, 2020 8:31 pm

Admiral wrote:
Thu Jul 30, 2020 7:19 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.
You will pay tax on the funds and the bond return when you eventually withdraw that money from your 401(k) or IRA. If you retire in the same tax bracket, it doesn't matter whether the money was already taxed or not; if you contribute $12,000 to a 401(k) for $9000 out of pocket, have it grow to $16,000, and then withdraw for $12,000 after tax, your return on the $9000 matched the bond return. (The same would apply in any tax bracket if you contributed $9000 to a Roth 401(k) rather than paying down $9000 against a loan; you would come out ahead if the bond rate in the 401(k) exceeds the loan rate). If you retire in a lower tax bracket, the benefit of contributing to a 401(k) is higher than the return on the bonds.

That said, it is still likely to be worth contributing to a 401(k) rather than paying down a mortgage at a slightly higher rate. Besides the potential benefit of retiring in a lower tax bracket, you get to keep the money growing tax-deferred even after you have paid off the mortgage. I am one of the stronger advocates of paying down a mortgage, but I maxed out my HSA, Roth IRA, and employer plan in preference to a mortgage paydown; when I paid it off, I did this entirely from my taxable account. And I rarely recommend that investors pay down a low-rate loan in preference to maxing out tax-deferred savings.
Admiral wrote: Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.
If your bond yield is lower than your mortgage rate, as you mentioned in the previous quote, the bonds are yielding less each month than the mortgage interest. (The recent returns may have been more than the mortgage interest, because rates have fallen, but the future returns on the same bonds are at the low current rates.)

How long you hold the bonds is not relevant to the decision. If you have 10 years left on your mortgage and buy a 10-year bond, you can reinvest the principal in another bond. If you pay down the mortgage, you will get the money back with interest in 10 years, and you can then reinvest that amount in another bond. This is the fair comparison. (If the yields are close, keeping the mortgage has other advantages; you can refinance if rates fall, and take advantage of higher bond yields because you didn't pay down the mortgage if rates rise.)
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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 8:31 pm

Admiral wrote:
Thu Jul 30, 2020 8:21 pm
willthrill81 wrote:
Thu Jul 30, 2020 7:49 pm
Admiral wrote:
Thu Jul 30, 2020 7:19 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm
rascott wrote:
Thu Jul 30, 2020 3:46 pm
Just don't be buying a bunch of bonds in today's environment with your investing.... while maintaining a mortgage. That's extremely inefficient.
Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?
I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.
Your comparison is wrong on both counts. Once the mortgage is gone, you can invest the funds previously used to pay it anyway you wish, and you've already said that your mortgage rate is higher than what your bonds are yielding.
“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

Admiral
Posts: 2920
Joined: Mon Oct 27, 2014 12:35 pm

Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Thu Jul 30, 2020 8:35 pm

willthrill81 wrote:
Thu Jul 30, 2020 8:31 pm
Admiral wrote:
Thu Jul 30, 2020 8:21 pm
willthrill81 wrote:
Thu Jul 30, 2020 7:49 pm
Admiral wrote:
Thu Jul 30, 2020 7:19 pm
willthrill81 wrote:
Thu Jul 30, 2020 3:48 pm


Correct. The only logical reason for doing that is if you need the liquidity that approach offers.

Some of the arguments I've heard for maintaining a post-tax 3.5% mortgage while simultaneously buying bonds with a pre-tax 1.2% yield are just crazy.
You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?
I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.
Your comparison is wrong on both counts. Once the mortgage is gone, you can invest the funds previously used to pay it anyway you wish, and you've already said that your mortgage rate is higher than what your bonds are yielding.
It’s true the mortgage RATE is higher. But the AMOUNT in pretax is greater than the mortgage balance. Hence, the coupons pay more than the interest. And the reason the amount is higher is that 100% of it is untaxed.

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willthrill81
Posts: 19669
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Thu Jul 30, 2020 8:44 pm

Admiral wrote:
Thu Jul 30, 2020 8:35 pm
willthrill81 wrote:
Thu Jul 30, 2020 8:31 pm
Admiral wrote:
Thu Jul 30, 2020 8:21 pm
willthrill81 wrote:
Thu Jul 30, 2020 7:49 pm
Admiral wrote:
Thu Jul 30, 2020 7:19 pm


You're assuming two things here:
a) one wants to hold stocks only with a mortgage and
b) one is not getting a deduction at one's marginal rate when one buys those bonds in a pre-tax account.

I have zero interest in being 100% stocks. I also hold a mortgage. I do not have 250k in already-taxed funds to pay off my mortgage. If I wanted to pay off my mortgage (or pre-pay it) using money that I would otherwise use to buy bonds, I'd need to pay 25% tax on those funds. Right now, I pay 0% income tax on those funds, 0% tax on the return on the bonds, and they return--yes--slightly less than my 2.25% mortgage.

But... so what?
I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.
Your comparison is wrong on both counts. Once the mortgage is gone, you can invest the funds previously used to pay it anyway you wish, and you've already said that your mortgage rate is higher than what your bonds are yielding.
It’s true the mortgage RATE is higher. But the AMOUNT in pretax is greater than the mortgage balance. Hence, the coupons pay more than the interest. And the reason the amount is higher is that 100% of it is untaxed.
Again, that's irrelevant. Grabiner addressed why better than I have.
“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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