Should i pay off my 15 year 2.85% mortgage?

[LittleMaggieMae]

Wouldn't shifting the mortgage debt to the rentals be a better plan? Take a new 127K mortgage on one of the rentals - and pay off your primary residence? Wouldn't that make more sense over all?

I, too, can't quite wrap my mind around why it's better to the income tax hit of selling 127K worth of investments only to turn around and put the monthly mortgage amount back into "investments". Remove 127K from any and all future growth. Isn't that WHY you take a low interest mortgage - so you can keep a big amount invested and/or continue to invest more over a longer period of time?? Why not just cash flow a bigger monthly payment (maybe invest less??) and pay down/off the mortgage in some time frame (5 years?). Wouldn't that achieve the same thing in 5 or 6 years?

[vineviz]

I really hate the mortgage is a negative bond mantra. On a balance sheet they completely negate each other, but in real life there are differences.

Okay, but in real life there are differences between all sorts of bonds: nominal vs TIPS, corporate vs Treasury, callable vs non-callable, USD-denominated vs foreign currency, coupon vs zero-coupon, and so on.

“Mortgages are negative bonds” is not the whole story, for sure, but it’s often a useful concept to grasp.

[HornedToad]

No, you should refinance it to a 2% 15 yr 0 cost mortgage instead. (At least if you live in CA but probably close in other states too with the correct lenders).

[EnjoyIt]

I really hate the mortgage is a negative bond mantra. On a balance sheet they completely negate each other, but in real life there are differences.

Okay, but in real life there are differences between all sorts of bonds: nominal vs TIPS, corporate vs Treasury, callable vs non-callable, USD-denominated vs foreign currency, coupon vs zero-coupon, and so on.

“Mortgages are negative bonds” is not the whole story, for sure, but it’s often a useful concept to grasp.

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Personal finance is personal and for most people trying to mix a mortgage into an AA allocation is of very low yield and actually will decrease one's expected returns. I wonder if anyone here knows of a fiduciary financial advisor who has their clients add in their mortgage as a part of the asset allocation to evaluate their risk tolerance.

And yes, I realize on a balance sheet they are exact opposites, but real life is not a balance sheet no matter how much I love spreadsheets.

[Aged Maduro]

op, did you mean that by paying off the mortgage, you would then invest the money that would have been your monthly mortgage payment? if so, why don't you simply stay invested? the $127K that you use to pay off the mortgage is $127K less in your portfolio to compound grow. so you will likely lose opportunity cost by doing so if you intend to continue to invest in the market.

i am only commenting on the financial prudence factor, not the psychological/emotional factor as i understand that some folks feel better with the notion that they own their house outright without debt. i, on the other hand, sleep better at night knowing that i have a 2.75% mortgage and that the monthly payment is getting cheaper and cheaper every month due to inflation, while the money that i could have used to pay off the mortgage is getting compound growth in my diversified portfolio.

Yes, after paying off the mortgage i would invest the same amount ($1,050) per month into my Roth 457 account. The reason for this is because it is Roth (tax advantaged) and will compliment my pension so that i can retire sooner.

[Aged Maduro]

I am 41 years old with a net worth of approximately $2.3 million. I am debt free except for my home mortgage. My accountant tells me that i should not pay it off. Your advice is appreciated on how to proceed.

I advise you to listen to your accountant. 2.85% is a pretty low rate.

With the large gains we have seen in the stock market it makes sense to me to just sell off $127,000 from the taxable account and pay off the mortgage.

Can you explain how the last half of your sentence follows from the first? I don't understand why the large gains would matter.

I would rather be debt free and keep my expenses low so in the event of future market crashes i can stop withdraws if need be.

You can always do what you would rather do, instead of listening to the financial professional you are paying. But if your real concern is withdrawing from your taxable account in the event of a market crash, is the best solution really to withdraw the money now?

The accountant does my tax return but has no connection to my brokerage account. His advice is based on the knowledge that i can make a better return than 2.85% on my investments. I am sure that he is right about that, but return is not my only concern. I do not have a high earned income so i want to keep my expenses low so i don't have to draw out of my investments.

So of course you can deal with whatever you feel is your actual concern. I'm not sure I understand never wanting to draw out of your investments. Maybe you should discuss that with your accountant.

The large gains means that i now have more money than i used to. That is why gains matter. The goal here is to reduce expenses so that i don't have to spend more money so that my money can make more money. Understand?

[lakpr]

No, you should refinance it to a 2% 15 yr 0 cost mortgage instead. (At least if you live in CA but probably close in other states too with the correct lenders).

Especially in California, thought must be given before refinancing, since one would lose the "non-recourse" nature of the primary mortgage debt ...

[JoeRetire]

The large gains means that i now have more money than i used to. That is why gains matter. The goal here is to reduce expenses so that i don't have to spend more money so that my money can make more money. Understand?

Are you saying that without the large gains you wouldn't have considered spending your money now so that you won't have to spend your money later?

[Aged Maduro]

Wouldn't shifting the mortgage debt to the rentals be a better plan? Take a new 127K mortgage on one of the rentals - and pay off your primary residence? Wouldn't that make more sense over all?

I, too, can't quite wrap my mind around why it's better to the income tax hit of selling 127K worth of investments only to turn around and put the monthly mortgage amount back into "investments". Remove 127K from any and all future growth. Isn't that WHY you take a low interest mortgage - so you can keep a big amount invested and/or continue to invest more over a longer period of time?? Why not just cash flow a bigger monthly payment (maybe invest less??) and pay down/off the mortgage in some time frame (5 years?). Wouldn't that achieve the same thing in 5 or 6 years?

I like having paid off rental properties because it gives me deep diversification. It's like an inflation adjusted bond with higher returns and tax write offs. The reason for investing the mortgage amount is because i would be putting it into a Roth 457 which is tax advantaged. This will compliment pension and allow me to retire sooner.

[Aged Maduro]

The large gains means that i now have more money than i used to. That is why gains matter. The goal here is to reduce expenses so that i don't have to spend more money so that my money can make more money. Understand?

Are you saying that without the large gains you wouldn't have considered spending your money now so that you won't have to spend your money later?

Yes. The large gains within my stock portfolio give me more resources to allocate. In this situation, i will use those resources to 1.) pay down debt and 2.) allocate future resources into a tax advantaged space ie Roth 457. If my portfolio had gone down in value i would be less inclined to do so. By selling off some of those gains now while market valuations are high then i am locking in some of those gains. The stock could always crash tomorrow.

[dmk395]

I paid one off, and somewhat regretted it. Was nice to be free of the note, but paying the taxes quarterly and lifestyle changes when you don't have the big bill.

I'd accelerate payments though! Pay it off, but not all at once

[JoeRetire]

The large gains means that i now have more money than i used to. That is why gains matter. The goal here is to reduce expenses so that i don't have to spend more money so that my money can make more money. Understand?

Are you saying that without the large gains you wouldn't have considered spending your money now so that you won't have to spend your money later?

Yes. The large gains within my stock portfolio give me more resources to allocate. In this situation, i will use those resources to 1.) pay down debt and 2.) allocate future resources into a tax advantaged space ie Roth 457. If my portfolio had gone down in value i would be less inclined to do so.

Okay, I understand.

By selling off some of those gains now while market valuations are high then i am locking in some of those gains.

Well you are consuming the gains by putting it in the walls of your house. They won't be locked in, they will be gone.

The stock could always crash tomorrow.

Yes any given stock could always crash tomorrow.

[Aged Maduro]

The large gains means that i now have more money than i used to. That is why gains matter. The goal here is to reduce expenses so that i don't have to spend more money so that my money can make more money. Understand?

Are you saying that without the large gains you wouldn't have considered spending your money now so that you won't have to spend your money later?

Yes. The large gains within my stock portfolio give me more resources to allocate. In this situation, i will use those resources to 1.) pay down debt and 2.) allocate future resources into a tax advantaged space ie Roth 457. If my portfolio had gone down in value i would be less inclined to do so.

Okay, I understand.

By selling off some of those gains now while market valuations are high then i am locking in some of those gains.

Well you are consuming the gains by putting it in the walls of your house. They won't be locked in, they will be gone.

The stock could always crash tomorrow.

Yes any given stock could always crash tomorrow.

The value of a paid off house is in imputed rent. It means that for the rest of our lives my family and i have a place to live that is rent and mortgage free. We plan to live here forever so that means a lot to me.

[mortfree]

If you are going to increase retirement account contributions you won’t really see the full mortgage payment after tax. Correct?

I think all along you are expecting $1000 or so leftover each month?

[JoeRetire]

The value of a paid off house is in imputed rent. It means that for the rest of our lives my family and i have a place to live that is rent and mortgage free.

At the cost of the amount used to pay off the mortgage along with whatever gains it would have earned. And of course maintenance, insurance, and taxes aren't free.

We plan to live here forever so that means a lot to me.

Then that is what is most important.

[vineviz]

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

[EnjoyIt]

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

Are you saying someone young who just bought a house and currently has a negative net worth should not effectively be 100% stocks? Does that mean they should own no stocks till they pay down the mortgage?

[willthrill81]

op, did you mean that by paying off the mortgage, you would then invest the money that would have been your monthly mortgage payment? if so, why don't you simply stay invested? the $127K that you use to pay off the mortgage is $127K less in your portfolio to compound grow. so you will likely lose opportunity cost by doing so if you intend to continue to invest in the market.

i am only commenting on the financial prudence factor, not the psychological/emotional factor as i understand that some folks feel better with the notion that they own their house outright without debt. i, on the other hand, sleep better at night knowing that i have a 2.75% mortgage and that the monthly payment is getting cheaper and cheaper every month due to inflation, while the money that i could have used to pay off the mortgage is getting compound growth in my diversified portfolio.

I don't know what the OP said, but your first paragraph describes what I (not the OP) had asked regarding selling taxable funds (either munis or S&p500 index funds), paying off 4.0% mortgage and then taking the cash flow gained from not having mortgage P&I monthly payments and investing them into taxable funds

The OP's last response states that that is the intent.

If 90% of your portfolio is in stocks, 10% is in bonds, and 10% is in a mortgage, then your effective allocation is 100% stock since the mortgage offsets the bonds. As such, if the OP pays off the mortgage with bond funds, then his/her effective AA will not change.

I really hate the mortgage is a negative bond mantra. On a balance sheet they completely negate each other, but in real life there are differences.

If we agree that personal finance is personal then not cluttering up ones mind with a mortgage being a negative is probably a good idea. Sure that person is adding real additional risk by having a higher equity allocation, but does it matter if that allocation allows them to sleep well at night and not make poor financial mistakes? There is a reason why no target date funds or financial advisors us mortgage as a negative bond to decide one's asset allocation. It just adds unnecessary complexity when it is not needed.

Note: In OP situation, because the mortgage is such a small part of their net worth, a mortgage functions very much like a negative bond not just on paper, but in real life application. If OP had for example $200k in invested assets, using mortgage as a negative bond thinking would be a horrible functional mistake.

I figured that someone might have an issue with the 'mortgage is a negative bond' concept. The only reason I brought it up is to point out that the OP's net risk profile in terms of stocks vs. fixed income will not change by 'swapping' bonds for the mortgage.

Personal finance is indeed just that. If someone doesn't want to include their mortgage in their AA for their own purposes, that's up to them.

[grabiner]

Wouldn't shifting the mortgage debt to the rentals be a better plan? Take a new 127K mortgage on one of the rentals - and pay off your primary residence? Wouldn't that make more sense over all?

I, too, can't quite wrap my mind around why it's better to the income tax hit of selling 127K worth of investments only to turn around and put the monthly mortgage amount back into "investments". Remove 127K from any and all future growth. Isn't that WHY you take a low interest mortgage - so you can keep a big amount invested and/or continue to invest more over a longer period of time?? Why not just cash flow a bigger monthly payment (maybe invest less??) and pay down/off the mortgage in some time frame (5 years?). Wouldn't that achieve the same thing in 5 or 6 years?

I like having paid off rental properties because it gives me deep diversification. It's like an inflation adjusted bond with higher returns and tax write offs. The reason for investing the mortgage amount is because i would be putting it into a Roth 457 which is tax advantaged. This will compliment pension and allow me to retire sooner.

Rentals are not bonds, because the income stream is not guaranteed; in an economic decline, you may have non-paying tenants, or need to lower the rent. They may still be good investments.

But I agree with keeping the mortgage on the primary home (if you keep it at all), because the mortgage rate on a primary home is usually lower than on a rental. In terms of finance, it doesn't matter where the loan is (unless you default on it). Borrowing $100K at 3% after tax costs you $3000 per year whether it is a home mortgage, rental mortgage, student loan, or auto loan, so it is only a good deal if using that $100K for some other purpose is better.

And if you aren't maxing out retirement accounts, keeping a low-rate loan is likely a good deal. You may earn slightly less at the same risk level than you pay in mortgage interest, but you get the benefit of long-term tax deferral, even after the mortgage is paid off.

However, by the same logic, unless the taxable account is needed for liquidity, it is a good deal to sell assets in the taxable account to contribute more to tax-advantaged accounts.

[Aged Maduro]

Wouldn't shifting the mortgage debt to the rentals be a better plan? Take a new 127K mortgage on one of the rentals - and pay off your primary residence? Wouldn't that make more sense over all?

I, too, can't quite wrap my mind around why it's better to the income tax hit of selling 127K worth of investments only to turn around and put the monthly mortgage amount back into "investments". Remove 127K from any and all future growth. Isn't that WHY you take a low interest mortgage - so you can keep a big amount invested and/or continue to invest more over a longer period of time?? Why not just cash flow a bigger monthly payment (maybe invest less??) and pay down/off the mortgage in some time frame (5 years?). Wouldn't that achieve the same thing in 5 or 6 years?

I like having paid off rental properties because it gives me deep diversification. It's like an inflation adjusted bond with higher returns and tax write offs. The reason for investing the mortgage amount is because i would be putting it into a Roth 457 which is tax advantaged. This will compliment pension and allow me to retire sooner.

Rentals are not bonds, because the income stream is not guaranteed; in an economic decline, you may have non-paying tenants, or need to lower the rent. They may still be good investments.

But I agree with keeping the mortgage on the primary home (if you keep it at all), because the mortgage rate on a primary home is usually lower than on a rental. In terms of finance, it doesn't matter where the loan is (unless you default on it). Borrowing $100K at 3% after tax costs you $3000 per year whether it is a home mortgage, rental mortgage, student loan, or auto loan, so it is only a good deal if using that $100K for some other purpose is better.

And if you aren't maxing out retirement accounts, keeping a low-rate loan is likely a good deal. You may earn slightly less at the same risk level than you pay in mortgage interest, but you get the benefit of long-term tax deferral, even after the mortgage is paid off.

However, by the same logic, unless the taxable account is needed for liquidity, it is a good deal to sell assets in the taxable account to contribute more to tax-advantaged accounts.

Can you please elaborate on how keeping a low interest home mortgage provides tax deferral? Even after the mortgage is paid off? I do not itemize so i am not sure how that tax deferral would work.

[oldcomputerguy]

This topic is now in the Personal Finance forum (mortgage question).

[Toons]

Yes
I think you should pay off your mortgage..
Liberate Yourself

[coachd50]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

[Aged Maduro]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

I want to clarify that once the mortgage is paid off i will be investing an amount equal to the the morgage ($1,050) every month into my Roth 457 Account and NOT back into my taxable account. The reason to do this is to max out the Roth since it is a tax advantage retirement account that will compliment my pension and allow me to retire sooner. Some on this message board did not seem to catch that so i want to be clear. Thanks.

[coachd50]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

I want to clarify that once the mortgage is paid off i will be investing an amount equal to the the morgage ($1,050) every month into my Roth 457 Account and NOT back into my taxable account. The reason to do this is to max out the Roth since it is a tax advantage retirement account that will compliment my pension and allow me to retire sooner. Some on this message board did not seem to catch that so i want to be clear. Thanks.

I apologize for somewhat hijacking your question with my own circumstances.

[vineviz]

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

Are you saying someone young who just bought a house and currently has a negative net worth should not effectively be 100% stocks? Does that mean they should own no stocks till they pay down the mortgage?

I’m saying that young investors typically have substantial sources of wealth outside of their investment portfolios, which typical means that their investment portfolios should be at least 100% in equities.

It would highly imprudent to take on a mortgage that exceeds the estimated value of human capital, in other words. For anyone who made that error, owning bonds in the investment portfolio would only compound the problem.

[Toons]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

On a Similar Note
After we paid the mortgage off years ago
That hypothetical mortgage payment was immediately auto invested monthly in a Vanguard Fund,
Did not miss a beat
Well over six figures now.
Reinvesting compounding.
Positive compounding
Not Negative

[LongRoad]

Honestly, you're doing well and will still be doing well whatever your decision.

But I'll stand by my suggestion to sell bonds in taxable to pay off the mortgage in your case. You have plenty of assets in your taxable account so that "liquidity" shouldn't be an issue for you.

Look at this another way. If you were mortgage free, would you take out your current mortgage (assuming no transaction cost) in order to invest in bonds in your taxable account?

[coachd50]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

On a Similar Note
After we paid the mortgage off years ago
That hypothetical mortgage payment was immediately auto invested monthly in a Vanguard Fund,
Did not miss a beat
Well over six figures now.
Reinvesting compounding.
Positive compounding
Not Negative

Yes, but isn't that somewhat different than selling off some assets in said Vanguard Fund, potentially paying cap gain taxes on those sales (albeit just at 15% for me) writing a check to mortgage company, and then replenishing that Vanguard Fund with the new cashflow?

I suppose the mathematical calculation is examining the difference between the cap gains tax and interest saved? Although, as someone also mentioned--those cap gains taxes are going to come at some point anyway (Just thinking aloud here)

[EnjoyIt]

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

Are you saying someone young who just bought a house and currently has a negative net worth should not effectively be 100% stocks? Does that mean they should own no stocks till they pay down the mortgage?

I’m saying that young investors typically have substantial sources of wealth outside of their investment portfolios, which typical means that their investment portfolios should be at least 100% in equities.

It would highly imprudent to take on a mortgage that exceeds the estimated value of human capital, in other words. For anyone who made that error, owning bonds in the investment portfolio would only compound the problem.

So are you now saying to calculate human capital as some form of positive bond? How do you do the math? Why are we getting so complicated here?

[Toons]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

On a Similar Note
After we paid the mortgage off years ago
That hypothetical mortgage payment was immediately auto invested monthly in a Vanguard Fund,
Did not miss a beat
Well over six figures now.
Reinvesting compounding.
Positive compounding
Not Negative

Yes, but isn't that somewhat different than selling off some assets in said Vanguard Fund, potentially paying cap gain taxes on those sales (albeit just at 15% for me) writing a check to mortgage company, and then replenishing that Vanguard Fund with the new cashflow?

I suppose the mathematical calculation is examining the difference between the cap gains tax and interest saved? Although, as someone also mentioned--those cap gains taxes are going to come at some point anyway (Just thinking aloud here)

Yes somewhat different.
I would be comfortable paying the capital gains
Paying off mortgage,
Continuing to invest as you say

[grabiner]

And if you aren't maxing out retirement accounts, keeping a low-rate loan is likely a good deal. You may earn slightly less at the same risk level than you pay in mortgage interest, but you get the benefit of long-term tax deferral, even after the mortgage is paid off.

Can you please elaborate on how keeping a low interest home mortgage provides tax deferral? Even after the mortgage is paid off? I do not itemize so i am not sure how that tax deferral would work.

If you put money in your 401(k) rather than using it to make extra mortgage payments, it grows tax-deferred. The money keeps growing tax-deferred until you need to withdraw it in retirement.

If you make extra mortgage payments, then you will have much more money to invest once the mortgage is paid off. But if the amount you have available for investing is more than the IRA and 401(k) contribution limit, you won't be able to put it all in the tax-deferred accounts. Thus you will lose the benefit of tax-deferred investing.

As a simple example, suppose that you have one year left on your 3% mortgage with a $6000 balance, and you can either pay off the mortgage now, or invest $6000 in a Roth IRA bond fund earning 1%. If you pay off the mortgage, you will have $12,000 to invest next year, so you can put $6000 in a Roth IRA next year but must invest $6000 in a taxable account. If you don't pay off the mortgage, you will have $6060 in the Roth IRA and $5820 to invest (since you paid $180 in interest), so you can invest the whole thing in the Roth IRA for a total balance of $11,880. It is better to have $5880 more in your Roth IRA rather than $6000 more in your taxable account, since gains on the Roth IRA will not be taxed.

[Meg77]

Is your accountant the one who does your taxes? What explanation did they give? I would find it hard to believe based on what you posted that you itemize, so there is no interest benefit. Perhaps they are of the logic that market returns will beat the 2ish percent of the mortgage and you are better off keeping the funds invested? Is your accountant the same person who takes your money to manage your taxable account? If so, and if they are compensated for making taxable trades and/or an AUM fee, then obviously they make more money if you leave more of your money in the account and so there is a conflict of interest in the advice.

I would pay it off.

The accountant does my tax return but has no connection to my brokerage account. His advice is based on the knowledge that i can make a better return than 2.85% on my investments. I am sure that he is right about that, but return is not my only concern. I do not have a high earned income so i want to keep my expenses low so i don't have to draw out of my investments.

I think you just answered your own question. Pay it off! If you miss it you can always get another mortgage down the road. Anyone who is living off a portfolio income should get rid of debt in my opinion. I'm sure a portion of the portfolio is invested in bonds which makes it even less reasonable to keep a loan "because I can earn more in the stock market." Your borrowing on the left to lend money out at a lower rate on the right. Be debt free and don't worry about the leverage game.

[Meg77]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

I want to clarify that once the mortgage is paid off i will be investing an amount equal to the the morgage ($1,050) every month into my Roth 457 Account and NOT back into my taxable account. The reason to do this is to max out the Roth since it is a tax advantage retirement account that will compliment my pension and allow me to retire sooner. Some on this message board did not seem to catch that so i want to be clear. Thanks.

I just want to point out that you could be moving money from taxable to Roth each month/year regardless of the mortgage decision. I would certainly be selling enough taxable every year to max out all Roth options!

[WoodSpinner]

Yes
I think you should pay off your mortgage..
Liberate Yourself

What are your opinions on the comments that after selling off securities and potentially (maybe not in the OP's case, but in my case) paying capital gains in taxable accounts to pay off a mortgage, the seller will then simply take the monthly cash flow savings and put it back into the market (presumably into the funds that were just liquidated.)

I want to clarify that once the mortgage is paid off i will be investing an amount equal to the the morgage ($1,050) every month into my Roth 457 Account and NOT back into my taxable account. The reason to do this is to max out the Roth since it is a tax advantage retirement account that will compliment my pension and allow me to retire sooner. Some on this message board did not seem to catch that so i want to be clear. Thanks.

Here is an alternative to consider.....

Keep mortgage
Max 457 Roth contributions
Sell assets from Taxable as needed to pay expenses.

WoodSpinner

[BackToSchoolDad]

Don't mean to hijack OP's thread, but I have a general pay down the mortgage question. In the middle of a refi to 3.25% on a $90,000 mortgage (best we could get), current AA is 100% equities, and no taxable account aside from the EF.

If you aren't currently using all tax advantaged space and will likely never have the income to do so, does it ever make sense to prepay the mortgage?

Been debating about where to route the freed up cash flow from the refi. I like the guaranteed return and don't particularly need the liquidity, but it does mean giving up tax advantaged space.

[jerrysmith]

If you want to pay it, pay it. Simple as that.
You're clearly a smart person and if you want to shed the debt go for it.

[willthrill81]

Yes and no. As with everything there is nuance. For an early investor this knowledge can decrease returns due to fear of a "too risky portfolio." For a late investor, it could increase returns by transitioning lower interest rate bonds into a mortgage. It really depends where one is in their investing cycle.

For someone who is hearing this term for the first time such as a new member we should elaborate a bit more on "mortgage is a negative bond" thinking describing the pros and cons for it.

For me for example, I never bothered adding my mortgage to my asset allocation which allowed me to stay more aggressive 70/30 plus ignored mortgage and sleep well at night. This active neglect was worth a lot of money since I was able to keep an extra few hundred thousand invested over the last decade.

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

Are you saying someone young who just bought a house and currently has a negative net worth should not effectively be 100% stocks? Does that mean they should own no stocks till they pay down the mortgage?

I’m saying that young investors typically have substantial sources of wealth outside of their investment portfolios, which typical means that their investment portfolios should be at least 100% in equities.

It would highly imprudent to take on a mortgage that exceeds the estimated value of human capital, in other words. For anyone who made that error, owning bonds in the investment portfolio would only compound the problem.

So are you now saying to calculate human capital as some form of positive bond? How do you do the math? Why are we getting so complicated here?

It's certainly not necessary to take things to that level.

I think that vineviz's point is that virtually any objective optimization function for an investor's glidepath will result in a young investor's investment portfolio being at least 100% stock, regardless as to whether the person has a mortgage.

Recently, Karsten from ERN had a post about his issues with target-date funds, and he briefly discussed why virtually all young investors should have a 100% stock AA in their investments.

But back to the 'mortgage is a negative bond' concept, investors with a 100% stock allocation in their portfolio and a mortgage have an effective AA that is beyond 100% stock due to the leverage created by the mortgage. It can easily be argued that this is entirely appropriate for young investors; leveraging one's portfolio is entirely logical for young investors. And yet for some reason, 100% stock allocations are widely held in disdain around here even for young investors.

All that said, it's probably less appropriate for investors nearing retirement to have a very aggressive AA.

Now in your case, ignoring the mortgage as a negative bond resulted in you having a more aggressive AA than otherwise, and that worked out well for you. But the point is that you probably should have had an aggressive AA even if you had treated your mortgage as a negative bond.

[BrandonBogle]

Your accountant is right -- the statistically optimal thing to do is refi your 15yr 2.85% mortgage into a no-cost 15yr 2% mortgage. If you want to lower your payments, 30yr 2.5% mortgage. Nothing prevents you from paying it off down the road if you decide you want to. And if you want to just pay it off now, that's a perfectly fine answer and may be optimal for you.

Mathematically, if you assume a modest 5% return, you're losing($127k x (5% - 2.85%)) = $2730 every year. Compounded over the 15 yrs of the mortgage, that's around $95k of lost gains. Either way, you'll be "fine", as your $1.7M will also have grown substantially if that comes to pass. So, your choice.

With only $127k balance, it is unlikely that the OP would get sweet deals on no cost refi. Generally, the best no cost refi deals are offered where the balances are $250k or higher.

I started a refi last week for 2.375% 15-year no-cost for $140k. They are around, but not as prevalent as for those with higher balances.

[Aged Maduro]

And if you aren't maxing out retirement accounts, keeping a low-rate loan is likely a good deal. You may earn slightly less at the same risk level than you pay in mortgage interest, but you get the benefit of long-term tax deferral, even after the mortgage is paid off.

Can you please elaborate on how keeping a low interest home mortgage provides tax deferral? Even after the mortgage is paid off? I do not itemize so i am not sure how that tax deferral would work.

If you put money in your 401(k) rather than using it to make extra mortgage payments, it grows tax-deferred. The money keeps growing tax-deferred until you need to withdraw it in retirement.

If you make extra mortgage payments, then you will have much more money to invest once the mortgage is paid off. But if the amount you have available for investing is more than the IRA and 401(k) contribution limit, you won't be able to put it all in the tax-deferred accounts. Thus you will lose the benefit of tax-deferred investing.

As a simple example, suppose that you have one year left on your 3% mortgage with a $6000 balance, and you can either pay off the mortgage now, or invest $6000 in a Roth IRA bond fund earning 1%. If you pay off the mortgage, you will have $12,000 to invest next year, so you can put $6000 in a Roth IRA next year but must invest $6000 in a taxable account. If you don't pay off the mortgage, you will have $6060 in the Roth IRA and $5820 to invest (since you paid $180 in interest), so you can invest the whole thing in the Roth IRA for a total balance of $11,880. It is better to have $5880 more in your Roth IRA rather than $6000 more in your taxable account, since gains on the Roth IRA will not be taxed.

The nice thing about my Roth 457 is that i can contribute up to $19,000 A YEAR!!! I think that this is further reason to just pay off the mortgage and plow all that money into the Roth.

[Aged Maduro]

Is your accountant the one who does your taxes? What explanation did they give? I would find it hard to believe based on what you posted that you itemize, so there is no interest benefit. Perhaps they are of the logic that market returns will beat the 2ish percent of the mortgage and you are better off keeping the funds invested? Is your accountant the same person who takes your money to manage your taxable account? If so, and if they are compensated for making taxable trades and/or an AUM fee, then obviously they make more money if you leave more of your money in the account and so there is a conflict of interest in the advice.

I would pay it off.

The accountant does my tax return but has no connection to my brokerage account. His advice is based on the knowledge that i can make a better return than 2.85% on my investments. I am sure that he is right about that, but return is not my only concern. I do not have a high earned income so i want to keep my expenses low so i don't have to draw out of my investments.

I think you just answered your own question. Pay it off! If you miss it you can always get another mortgage down the road. Anyone who is living off a portfolio income should get rid of debt in my opinion. I'm sure a portion of the portfolio is invested in bonds which makes it even less reasonable to keep a loan "because I can earn more in the stock market." Your borrowing on the left to lend money out at a lower rate on the right. Be debt free and don't worry about the leverage game.

My gut tells me to pay it off and i can contribute up to $19,000 a year into my Roth 457. It makes sense to me to send more money into that account each month than paying it to the mortgage banker. I also agree that when living off of investments, even partially, that it is best to be completely debt free. Thanks for your comments.

[grabiner]

And if you aren't maxing out retirement accounts, keeping a low-rate loan is likely a good deal. You may earn slightly less at the same risk level than you pay in mortgage interest, but you get the benefit of long-term tax deferral, even after the mortgage is paid off.

Can you please elaborate on how keeping a low interest home mortgage provides tax deferral? Even after the mortgage is paid off? I do not itemize so i am not sure how that tax deferral would work.

If you put money in your 401(k) rather than using it to make extra mortgage payments, it grows tax-deferred. The money keeps growing tax-deferred until you need to withdraw it in retirement.

If you make extra mortgage payments, then you will have much more money to invest once the mortgage is paid off. But if the amount you have available for investing is more than the IRA and 401(k) contribution limit, you won't be able to put it all in the tax-deferred accounts. Thus you will lose the benefit of tax-deferred investing.

As a simple example, suppose that you have one year left on your 3% mortgage with a $6000 balance, and you can either pay off the mortgage now, or invest $6000 in a Roth IRA bond fund earning 1%. If you pay off the mortgage, you will have $12,000 to invest next year, so you can put $6000 in a Roth IRA next year but must invest $6000 in a taxable account. If you don't pay off the mortgage, you will have $6060 in the Roth IRA and $5820 to invest (since you paid $180 in interest), so you can invest the whole thing in the Roth IRA for a total balance of $11,880. It is better to have $5880 more in your Roth IRA rather than $6000 more in your taxable account, since gains on the Roth IRA will not be taxed.

The nice thing about my Roth 457 is that i can contribute up to $19,000 A YEAR!!! I think that this is further reason to just pay off the mortgage and plow all that money into the Roth.

This is a good idea as long as you won't be significantly over maxing out tax-advantaged savings once the mortgage is gone. If you would, then it is better to max out, but to pay down the mortgage in preference to taxable savings, so that you don't miss out on tax-advantaged space.

[KyleAAA]

This amount is too small relative to your net worth to make a noticeable difference one way or the other. Flip a coin. I’d leave as is because it’s simpler. You can funnel money into your Roth without paying off the mortgage. Those decisions are independent of one another.

[EnjoyIt]

Perhaps the problem isn’t with explaining how a mortgage is like a negative bond, but with the idea (much more widely promulgated on this forum) that effective allocations of 100% stocks or more is “risky” for early accumulators.

Besides, young investors typically have another large bond-like asset in the form of human capital which can (should?) more than offset the “negative bond” of a mortgage in the household balance sheet.

Are you saying someone young who just bought a house and currently has a negative net worth should not effectively be 100% stocks? Does that mean they should own no stocks till they pay down the mortgage?

I’m saying that young investors typically have substantial sources of wealth outside of their investment portfolios, which typical means that their investment portfolios should be at least 100% in equities.

It would highly imprudent to take on a mortgage that exceeds the estimated value of human capital, in other words. For anyone who made that error, owning bonds in the investment portfolio would only compound the problem.

So are you now saying to calculate human capital as some form of positive bond? How do you do the math? Why are we getting so complicated here?

It's certainly not necessary to take things to that level.

I think that vineviz's point is that virtually any objective optimization function for an investor's glidepath will result in a young investor's investment portfolio being at least 100% stock, regardless as to whether the person has a mortgage.

Recently, Karsten from ERN had a post about his issues with target-date funds, and he briefly discussed why virtually all young investors should have a 100% stock AA in their investments.

But back to the 'mortgage is a negative bond' concept, investors with a 100% stock allocation in their portfolio and a mortgage have an effective AA that is beyond 100% stock due to the leverage created by the mortgage. It can easily be argued that this is entirely appropriate for young investors; leveraging one's portfolio is entirely logical for young investors. And yet for some reason, 100% stock allocations are widely held in disdain around here even for young investors.

All that said, it's probably less appropriate for investors nearing retirement to have a very aggressive AA.

Now in your case, ignoring the mortgage as a negative bond resulted in you having a more aggressive AA than otherwise, and that worked out well for you. But the point is that you probably should have had an aggressive AA even if you had treated your mortgage as a negative bond.

Agreed. Obviously how well it worked for me was part luck as well since markets were very cooperative over the last decade.

I just don’t want the mantra of mortgage as a negative bond without the qualification of its implications. It is honestly much easier to just ignore it until later in one’s investing life.

But, nothing wrong with people learning and understanding all the details.

[Aged Maduro]

Honestly, you're doing well and will still be doing well whatever your decision.

But I'll stand by my suggestion to sell bonds in taxable to pay off the mortgage in your case. You have plenty of assets in your taxable account so that "liquidity" shouldn't be an issue for you.

Look at this another way. If you were mortgage free, would you take out your current mortgage (assuming no transaction cost) in order to invest in bonds in your taxable account?

I think your advice is sound and i will probably do just that. Not having many bonds left over doesn't bother me because of all my paid off real estate. While i know some would object, i think of my paid off rental properties as inflation adjusted bonds that provide the same stability that bonds do. They also have much higher return and tax advantages. At this point i will most likely do as you suggest...1) pay off the mortgage by selling bonds in the taxable account then 2) divert the monthly mortage amount i was paying ($1,050) into my Roth 457 in order to max it out then 3) over the next 5 to 10 years take the stock gains in my taxable account to buy a few more rental properties in cash and then 4) Retire Early.

[Admiral]

Thanks all for your input. This has confirmed my gut feeling of paying it off with funds from the taxable account. Good advice on selling the taxable bonds since they are getting less than a 2.85% after tax return. While being somewhat apprehensive about being left with a 100% equities taxable account, i view the paid off house and rental properties as being the same as a bond allocation so it makes sense to me. Paid off real estate makes up about 30% of my net worth and can provide the same stability that bonds do and with a better return.

If you think real estate is the same as bonds, then how do you plan to generate cash that's less than the total value of the real estate? Sell one room, or get a loan against the property? If you cannot rent out your real estate, you will presumably be operating said real estate at a loss. How is that like bonds?

I don't want to go down the mortgage-as-negative-bond rabbit hole, but I'd caution you to seriously reconsider treating rental real estate as "the same as a bond allocation."

Bonds preserve capital. Real estate can, and often does, lose value.

Let me tell you about all the empty apartments in my neighborhood right now....

[Aged Maduro]

Thanks all for your input. This has confirmed my gut feeling of paying it off with funds from the taxable account. Good advice on selling the taxable bonds since they are getting less than a 2.85% after tax return. While being somewhat apprehensive about being left with a 100% equities taxable account, i view the paid off house and rental properties as being the same as a bond allocation so it makes sense to me. Paid off real estate makes up about 30% of my net worth and can provide the same stability that bonds do and with a better return.

If you think real estate is the same as bonds, then how do you plan to generate cash that's less than the total value of the real estate? Sell one room, or get a loan against the property? If you cannot rent out your real estate, you will presumably be operating said real estate at a loss. How is that like bonds?

I don't want to go down the mortgage-as-negative-bond rabbit hole, but I'd caution you to seriously reconsider treating rental real estate as "the same as a bond allocation."

Bonds preserve capital. Real estate can, and often does, lose value.

Let me tell you about all the empty apartments in my neighborhood right now....

I realize that real estate is not the exact same thing as a bond but it serves much the same function in my situation (ie providing stability to my overall portfiolio and income) provided that it is PAID OFF. Here is how i do it:

-I only invest in single family ranch homes in solid middle class neighborhoods. Single families are easier to both buy and sell.
- These kinds of houses attract good, long term dual income tenants who are responsible and i have a thorough tenant screening process.
- I have not had a vacancy in five years but if i did it is no big deal because i have multiple units, and did i mention? They are PAID OFF.
- If i need to liquidiate for any reason i can sell a single family house in less than 60 days unlike any other property type (apartments, office buildings, retail strips can take years to sell)
- Between rents, appreciation, principal paydown and deprecation my real estate investments have made me at least 12% ROI year over year. How did your bonds do?
- My rental property business allows me to take tax deductions for my home office, business expenses, gas mileage, continuing education and related meals and travel.
- Single family rentals are low maintenance. Sometimes i don't hear from my tenants for months.

You're right. Real estate is not the same as bonds. It is much, much better than bonds.

[vineviz]

So are you now saying to calculate human capital as some form of positive bond? How do you do the math? Why are we getting so complicated here?

It's certainly not necessary to take things to that level.

I think that vineviz's point is that virtually any objective optimization function for an investor's glidepath will result in a young investor's investment portfolio being at least 100% stock, regardless as to whether the person has a mortgage.

Thank you. The was, indeed, my point.

I don't think it is necessary for the typical investor to explicitly consider either the mortgage as a negative bond or human capital as a positive bond. Generations of economists have done this analysis already so that individual investors don't need to do it for themselves unless they want to.

However, I DO think that investors who are curious and want to understand specifically WHY the default asset allocation for young accumulators is at least 100% equities can benefit from working through the entire household balance sheet. That means including the implicit wealth (aka "positive bond") embedded in human capital and the liability (aka "negative bond") associated with consumer debt.

At the very least, I hope that most investors can see that buying bonds with a yield of 1.2% while "issuing" bonds (i.e. mortgages) at 2.5% or more is probably not a rational strategy for wealth maximization.

Banks make their money by borrowing at low interest rates and lending at high interest rates, after all. Households cannot expect to make money by borrowing at high rates and lending at low rates, not without taking on a lot of risk.

[willthrill81]

At the very least, I hope that most investors can see that buying bonds with a yield of 1.2% while "issuing" bonds (i.e. mortgages) at 2.5% or more is probably not a rational strategy for wealth maximization.

Why so many intelligent people here try to endlessly counter this point is truly beyond my comprehension.

[Admiral]

At the very least, I hope that most investors can see that buying bonds with a yield of 1.2% while "issuing" bonds (i.e. mortgages) at 2.5% or more is probably not a rational strategy for wealth maximization.

Why so many intelligent people here try to endlessly counter this point is truly beyond my comprehension.

The reason is multifaceted. (And, as an aside, I agree that holding bonds below your mortgage rate in a taxable account is not necessarily optimal. Though, depending on circumstances, it's not likely to be hugely detrimental, either.)

Reason #1
Bonds provide a source of liquid capital. A house does not. Therefore--and assuming one does not care/need to be 100% equities--reducing a housing debt does not provide a source of liquidity. Example: I need $50,000 to pay my tuition bill... or I can pay off my $50,000 mortgage balance, freeing up some monthly cashflow. But, the cashflow is not enough to pay the tuition bill. Therefore, I keep the bonds, with the understanding that yes, I will lose out a little on the interest arbitrage.

Reason #2.
I don't care to be 100% stock, and I can get a 25% tax deduction when I buy bonds in a tax-advantaged account, even though they pay a bit less than my mortgage costs me. I COULD, of course, pay the 25% tax on my income and use the remaining 75% to pre-pay my mortgage, or to save enough to eventually pay it off. But my bond holdings fluctuate, and I won't need the bonds (or their income) for many years... when my mortgage will be paid off. Meanwhile, the interest they pay me today compounds, perhaps for decades.

Reason #3
"Wealth maximization" is not always the goal of all investors. If it was, well, wouldn't we all be wise to be 100% stock? I need "enough," not necessarily the maximum that I can get.