Paying off sub 4% mortgage interest rate early

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EnjoyIt
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Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

vineviz wrote: Mon Sep 21, 2020 8:43 am
unclescrooge wrote: Mon Sep 21, 2020 12:00 am
vineviz wrote: Fri Sep 11, 2020 6:41 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
At 4%-ish, there is absolutely no better fixed income investment you can make than paying down a mortgage.

Certainly no investor should be holding bonds in any taxable account while carrying a mortgage at rates above 2.75%.
So what should you use for your emergency fund?
Good catch. I should have specified that I was speaking specifically about long-term investments (e.g. retirement accounts).

Bonds can certainly play an important role in emergency funds and other short-term savings goals.
My perception or the way I handle this sub 4% mortgage discussion and how I would order the priority for those in the higher tax brackets

1) Max company match in 401k
2) Max out tax advantages space
3) Invest in taxable account as per the desired AA until one has a decent amount of liquidity to withstand a few years of turmoil.
4) Start considering the mortgage as a negative bond and divert bond contributions instead towards the mortgage.

Basically early in one’s career they should be investing as much as possible because time in the market is most important. Once a reasonable amount if wealth is invested, a family can comfortably begin paying down a low interest rate mortgage. What “a reasonable amount of wealth” actually is will likely vary from person to person. I did not start paying down my 2.75% mortgage until I had 25x expenses in investments. In retrospect I would have followed this path sooner.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
raamakoti
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Re: Paying off sub 4% mortgage interest rate early

Post by raamakoti »

30 year 3.875%
Three years into it and knocked off Additional 36k towards principal
Refinanced @2.5 % with Lenderfi for 20 years. If we can payoff in next 5 to 10 years we will.
dknightd
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Re: Paying off sub 4% mortgage interest rate early

Post by dknightd »

EnjoyIt wrote: Sun Sep 13, 2020 10:26 am To lay it out simply.

For most people early in their accumulation phase, liquidity and investing in equities is much more valuable than a paid off mortgage. Keep the mortgage for now but try and refinance.

For those who are towards the end of their accumulation, paying down the mortgage is a great decision.

For those in between should decide based on their own risk profile. And of course a few others will complete disagree and do what they feel is best for them.
I think this is good advice. At least it worked for me. I never paid extra on my mortgage until I was retired.
When I bought my house we were paying 10% on a 30 year loan. Back then CD's were paying about 10%! We refinanced several times. Usually restarting the 30 clock. The last time was for 15 years at 3.25%. Yes, all in the same house, which is perhaps unusual. Now I'm retired. If I paid the mortgage off as scheduled it would be done in 8 years. Bringing the total term of payoff to 38 years. When I would be 68. I plan to claim SS at 70. I plan to pay it off in 2 years (give or take). The increased standard deduction means I can no longer deduct mortgage interest. I'm tempted to pay it off faster, but that would kick my tax deferred retirement withdrawals into the next tax bracket. When the mortgage is done, I'll do more Roth conversions to keep me in the same tax bracket. For now I'm doing about 50/50 extra mortgage payment and Roth conversions. Only time will tell if this was a good decision . . .
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
dknightd
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Re: Paying off sub 4% mortgage interest rate early

Post by dknightd »

Edit: I should add, I was never able to max out my tax deferred contributions while working. If I had, that might have changed my plan.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.
TigerNest
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Re: Paying off sub 4% mortgage interest rate early

Post by TigerNest »

We just bought our first house and have a 2.25%, 15 year fixed loan (no points paid, we just got really lucky on timing).

I've always planned on paying down my mortgage aggressively. However, due to how low the interest rate is, I'm considering keeping it for the life of the loan as a hedge against inflation.

The best hedge against inflation isn't equities, it's fixed debt. If inflation is at 5% and your mortgage is at 2.5%, you're making money on every dollar you borrowed. Because inflation has been so hard to hedge against (TIPS have negative yield after taxes), I'm discovering there's a scarcity value to your portfolio in having a low interest mortgage.

I think the reason these 'pay off or keep' discussions are perpetually unresolved is due to difference in risk tolerance. Investing in equities indisputably yields a higher expected return than paying off your mortgage. Investing in bonds/cash/CDs almost always yields a lower return after tax. The decision, I think, comes down to what you planned to do with the money instead.

I also always felt like the lack of a mortgage payment every month not only increased my peace of mind, but it would alter my risk tolerance. If I lost my job or had a long-term illness, I wouldn't lose my house. By paying off my mortgage I would be more comfortable with a higher percentage of assets in equity.
mass_biker
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Re: Paying off sub 4% mortgage interest rate early

Post by mass_biker »

Has anyone come up with a good rule of thumb of % or x of expenses net of a mortgage payoff in "liquid assets" even before ER or FIRE or whatever (i.e. still working).

Piggybacking on an earlier poster who noted that in one's earlier working years, "time in the market" makes all the difference, and at some point, you consider whittling away that pesky debt with proceeds from liquid expenses.

Understanding, that a mortgage payoff reduces one's liquid holdings (and increases exposure to a less liquid asset, albeit reducing interest payments) - how have people thought about the

- right % of liquid investments that can be used for a mortgage payoff?
- what the resulting liquid investments end up as a % of the total portfolio (note, not an emergency fund)
- what the resulting liquid investments ought to be as % or x of new expenses?

My math tells me I "can" do it, but the reduced optionality of not holding cash or munis or whatever gives me pause.

Similarly, what have folks done with the extra CF each month with a mortgage payoff?

- build an incremental cash buffer?
- invest per IPS?
- take more risk (given that that they have eliminated a negative bond)?

Thanks

m_b
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grabiner
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Re: Paying off sub 4% mortgage interest rate early

Post by grabiner »

mass_biker wrote: Wed Sep 23, 2020 12:56 pm Has anyone come up with a good rule of thumb of % or x of expenses net of a mortgage payoff in "liquid assets" even before ER or FIRE or whatever (i.e. still working).

Piggybacking on an earlier poster who noted that in one's earlier working years, "time in the market" makes all the difference, and at some point, you consider whittling away that pesky debt with proceeds from liquid expenses.
You can eliminate the "time in the market" effect by paying off your mortgage with dollars that would otherwise have been invested in bonds. (This is what I did, selling stocks to pay off my mortgage because my taxable account is all stock, but moving an equal amount from bonds to stocks in my employer plan.)
Wiki David Grabiner
EnjoyIt
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Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

mass_biker wrote: Wed Sep 23, 2020 12:56 pm Has anyone come up with a good rule of thumb of % or x of expenses net of a mortgage payoff in "liquid assets" even before ER or FIRE or whatever (i.e. still working).

Piggybacking on an earlier poster who noted that in one's earlier working years, "time in the market" makes all the difference, and at some point, you consider whittling away that pesky debt with proceeds from liquid expenses.

Understanding, that a mortgage payoff reduces one's liquid holdings (and increases exposure to a less liquid asset, albeit reducing interest payments) - how have people thought about the

- right % of liquid investments that can be used for a mortgage payoff?
- what the resulting liquid investments end up as a % of the total portfolio (note, not an emergency fund)
- what the resulting liquid investments ought to be as % or x of new expenses?

My math tells me I "can" do it, but the reduced optionality of not holding cash or munis or whatever gives me pause.

Similarly, what have folks done with the extra CF each month with a mortgage payoff?

- build an incremental cash buffer?
- invest per IPS?
- take more risk (given that that they have eliminated a negative bond)?

Thanks

m_b
I don’t think anyone can give you a rule of thumb percentage because it requires taking into account one’s risk tolerance which is very personal. It also needs to take into account if the home is in a Very high cost of living area or not. I personally did not pay off my mortgage until I had about 25x expenses.

The way I saw it was that time in the market was most important. I never subscribed to this whole mortgage as a negative bond mentality until I set direction to paying down debt. It is much easier and with a higher expected return to just ignore the negative bond mentality and simply keep investing up until you feel like you have a good amount of wealth. Then you can start throwing more cash toward your debt with the goal of having it paid off ideally when you get to about 25x expenses in wealth.

In economics terms, a mortgage is very similar to a negative bond. But if you ignore that fact, you psychologically are able to take on a bit more risk by leveraging your home to purchase equities which has a much higher expected return compared to paying down a low interest rate mortgage. Ignorance is bliss in this situation.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
togb
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Re: Paying off sub 4% mortgage interest rate early

Post by togb »

I'm in the process of a refi. Residence mortgage is at 3.3875%, investment house at 4.3875%. I'm looking to refi my residence, and take out cash sufficient to pay off the investment house. Rates are always best for the primary residence, and this will increase my cashflow nicely. It will likely bump my taxable income up just a bit (since I won't be paying the mortgage interest on the rent house) but there will be more in my pocket than in the tax bill.

Looks like I can land on 2.875% with very modest closing costs. I am not a huge fan of having the larger mortgage, but it's really optics, since it's the same amount I had in the TWO mortgages. I'll be self escrowing, and will take the $ that would have gone to interest on the rent house to pay down principle faster on the new mortgage.

I"m still doing spreadsheets to validate I've thought of everything, but seems to me like it's cheap money. I will save $400/month AND be able to pay down the consolidated note faster.
arsenalfan
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Re: Paying off sub 4% mortgage interest rate early

Post by arsenalfan »

BF2011 wrote: Mon Sep 21, 2020 12:28 am
arsenalfan wrote: Wed Sep 16, 2020 8:06 pm Psychologic peace of mind vs mathematical optimization. And everyone's situation is different.

Here's mine:
23 years left on 30 year fixed 3.35%. 2MM home, 1.3 original loan, now 700k. VHCOL, due to SALT elimination don't itemize.
I am now refinancing to a 15 year 2.85% loan at a $7000 cost.
Have other rental properties that cashflow positive. Major one I know I will keep for 30+ years has 4.3% rate 20yr term.
IPS says to take surplus cash and invest 2/3 in aftertax account, and 1/3 towards a mortgage.
Lately I've been paying down the rental principle. Once that's dead and cashflowing even more positively, will pay down the primary home.
Not sure if we will downsize in 10 years is the kicker...
curious why are you choosing to pay off rental first instead of primary. especially since you no longer itemize, wouldn't interest on rental give you more tax advantage? I paid off my primary first, and the only reason I am paying off my investment property loan now is because I am having a hard time finding anyone willing to do a refi for investment properties, and the few that do don't offer that good of a rate. my current rate is 4.625%. so with tax benefits, it's like paying 3% or so interest. I might be able to refi it down to 4%, but probably not worth the trouble. 3% is still a pretty good return at the moment...
My thinking is that I'll keep the rentals until I die, so accelerate their payoff and realize the cashflow sooner.
Our primary home is likely not the forever home.
sergio
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Re: Paying off sub 4% mortgage interest rate early

Post by sergio »

We're on track to pay off next spring once the mortgage balance = half of our emergency fund. Half of the emergency fund was earmarked for mortgage payments so with no mortgage we won't need to hold that cash which is rotting away at <1%

With interest rates so low and equities so high despite the high economic uncertainty, we've gone all in on paying off our mortgage (15 year at 3.25%) because it's a decent guaranteed "return" and there's a huge psychological benefit to owning our home outright, and the peace of mind that even if I lost my job we could make ends meet (albeit with a more spartan lifestyle) if I had to take a job at Costco or Target...
EnjoyIt
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Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

sergio wrote: Fri Sep 25, 2020 11:13 am We're on track to pay off next spring once the mortgage balance = half of our emergency fund. Half of the emergency fund was earmarked for mortgage payments so with no mortgage we won't need to hold that cash which is rotting away at <1%

With interest rates so low and equities so high despite the high economic uncertainty, we've gone all in on paying off our mortgage (15 year at 3.25%) because it's a decent guaranteed "return" and there's a huge psychological benefit to owning our home outright, and the peace of mind that even if I lost my job we could make ends meet (albeit with a more spartan lifestyle) if I had to take a job at Costco or Target...
This is a great point that I think some neglect to realize. If people hold 6-12 months of expenses in an Emergency fund languishing at sub 1%, paying off a mortgage adds an additional advantage, that additional emergency cash can also be used to finish the loan off at the end of its life.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Tamarind
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Re: Paying off sub 4% mortgage interest rate early

Post by Tamarind »

Yes, but it's not very rational.

2 years into a 5/1 ARM refi at 3.09%. I'm paying an extra $500 per month, which allows me to pay it off on the completion date of my original 15-year fixed loan, in 5 years. I refinanced to lower my rate, not to extend the term and be in debt longer.

It would probably make more sense to invest the extra payments in taxable and pay it off in a lump on my desired date. But I like having all my bills on autopilot and not having to worry about market performance derailing my plan.
getthatmarshmallow
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Re: Paying off sub 4% mortgage interest rate early

Post by getthatmarshmallow »

$85K left on a 15y, 3.875 loan, paying roughly double per month. Now I'm kind of re-evaluating. I had part of our emergency fund tiered into a CD ladder, which was great two years ago but a complete waste of time now, and I'm wondering if I should just re-direct that cash at the mortgage or buy more stocks.
sergio
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Re: Paying off sub 4% mortgage interest rate early

Post by sergio »

getthatmarshmallow wrote: Fri Sep 25, 2020 3:31 pm $85K left on a 15y, 3.875 loan, paying roughly double per month. Now I'm kind of re-evaluating. I had part of our emergency fund tiered into a CD ladder, which was great two years ago but a complete waste of time now, and I'm wondering if I should just re-direct that cash at the mortgage or buy more stocks.
That's what I'm doing - specifically the mortgage. Interest rates are trash, equities are very, very expensive, I figure attacking the mortgage now is not the worst decision in the world, especially from a peace of mind perspective.
EnjoyIt
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Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

getthatmarshmallow wrote: Fri Sep 25, 2020 3:31 pm $85K left on a 15y, 3.875 loan, paying roughly double per month. Now I'm kind of re-evaluating. I had part of our emergency fund tiered into a CD ladder, which was great two years ago but a complete waste of time now, and I'm wondering if I should just re-direct that cash at the mortgage or buy more stocks.
If that plan is to put it all in equities, then yeah that’s likely your best bet. If the plan is to put it in bonds or CDs then you should pay off the mortgage. If the plan is to put it into your desired AA and it is relatively high in equities, that is also likely your best decision. If you are getting close to retiring or hitting your retirement number you can afford the pleasure of being debt free.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
getthatmarshmallow
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Re: Paying off sub 4% mortgage interest rate early

Post by getthatmarshmallow »

EnjoyIt wrote: Fri Sep 25, 2020 6:54 pm
getthatmarshmallow wrote: Fri Sep 25, 2020 3:31 pm $85K left on a 15y, 3.875 loan, paying roughly double per month. Now I'm kind of re-evaluating. I had part of our emergency fund tiered into a CD ladder, which was great two years ago but a complete waste of time now, and I'm wondering if I should just re-direct that cash at the mortgage or buy more stocks.
If that plan is to put it all in equities, then yeah that’s likely your best bet. If the plan is to put it in bonds or CDs then you should pay off the mortgage. If the plan is to put it into your desired AA and it is relatively high in equities, that is also likely your best decision. If you are getting close to retiring or hitting your retirement number you can afford the pleasure of being debt free.
Thanks for this -- more or less mirroring my own thinking. I'm about 25 years out from retirement. Spouse would prefer to have the mortgage gone for non-math reasons; just likes the idea of being debt-free. I don't really care as long as we do something productive with the money -- our savings rate is solid without considering the extra mortgage principal payments.
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Que1999
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Re: Paying off sub 4% mortgage interest rate early

Post by Que1999 »

We paid off our 30-year mortgage in 8 years. Had a small taxable account on the side, but the majority of extra cash went to paying down the 4.375% mortgage. The 8 years of the pay-down, the market did pretty good.... I sat down one day after the mortgage was gone and compared the pay-down increments vs. if the cash went into my taxable equity-heavy investments instead.

If I had invested the money instead of paying the mortgage off, and paid off the mortgage once the taxable reached/surpassed the remaining mortgage balance, the house would have been paid off around 3.5-4 years earlier... Nearly half the time it took with the pay-down. Of course, hindsight is 20/20, but if the market would have tanked I really believe I would have continued to buy taxable equities while they were cheap and just held onto the mortgage for the time being.

This is my stance from personal experience with the mortgage pay-down/off vs. investing debate. Taxable, broad-based cheap equity index funds until that balance surpasses the mortgage balance and outperforms the mortgage rate after-tax. It would have changed so much for us if we did that in our situation...
:idea:
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