Mortgage Payoff Question in HCOL area

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richmondam
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Mortgage Payoff Question in HCOL area

Post by richmondam » Tue Dec 05, 2017 11:48 pm

Hi Everyone,

I'm close to retiring student debt and am now thinking about what's next. After having read the board and running some numbers, I'm definitely onboard with paying off the mortgage. Accelerating payments will allow me to save $150K - 200K in interest if I pay off in the next few years. Current balance is $424K, 30 yr fixed at 4%. We live in a HCOL and that mortgage got us a very reasonable house in a decent school district. I don't expect to move anytime soon, so the pressure to save for the next house is not there right now.

Given the mortgage balance is large I started worrying about liquidity. I know I could always take a HELOC, but it just seems like a lot of money that's tied up in a house. Related to that, since it will take me a few years is there an opportunity cost I should factor on how I could use that money?

On other fronts I have an emergency fund, maxing out on all tax deferred accounts, and have a cushion in my taxable account as well.

Would love to hear what people think.

ENT Doc
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Re: Mortgage Payoff Question in HCOL area

Post by ENT Doc » Wed Dec 06, 2017 5:59 am

How many payments have you made of the 360?

Grt2bOutdoors
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Re: Mortgage Payoff Question in HCOL area

Post by Grt2bOutdoors » Wed Dec 06, 2017 7:13 am

What does your disposable income after expenses look like? If you are going to tie up all your liquidity in house, then no.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Watty
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Re: Mortgage Payoff Question in HCOL area

Post by Watty » Wed Dec 06, 2017 7:15 am

There is a wiki on this choice if you have not seen it.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One option would be to save up around $100K and then see if your lender will "recast your mortgage"(Google this) if you pay off 25% of your loan amount. They are not required to do this but they usually will for a small processing fee. If you do this then the length of the loan and interest rate stay the same but your required mortgage payment is reduced by the same percentage. This can be important in case something happens like a job loss or interest rates go way up.

There are lots of opinions on this but I like to turn the question around to look at it from a different angle and ask. "I have a paid off house, should I take out a loan to invest the money?" This is really just about the same question but few people would do that.

Leemiller
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Re: Mortgage Payoff Question in HCOL area

Post by Leemiller » Wed Dec 06, 2017 8:19 am

I would never rely on access to a HELOC given how they were frozen in the financial crisis, when many were hoping to rely on them. You could pay off the loan using a 15-20 year schedule to save on interest. I would question your figures on how much your saving. It looks high for a 4% mortgage to me. Then you really need to consider that money in 10 years is not worth what it is today -time value of money - plus what your effective after tax interest rate it.

We live in a HCOL area with a mortgage that is currently over 800k. I’ve decided once we have a big number in after tax investments to reconsider any pay down but not before.

richmondam
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Re: Mortgage Payoff Question in HCOL area

Post by richmondam » Wed Dec 06, 2017 8:53 am

Thanks all, I got the figure from the bankrate mortgage prepayment calculator, if I reduce the loan length to about 11 years then the savings is about $200K.

Good point on the disposable income point, I would still have that between both of our salaries, so not concerned there.

The recast is interesting, will read more about that. I did look at the wiki and other articles, it all points to prepaying but it seems to be more of a no-brainer to me when the loan balances are 100-300K range. 424K felt a little high to me, but that could just be a psychological angle.

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Watty
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Re: Mortgage Payoff Question in HCOL area

Post by Watty » Wed Dec 06, 2017 9:02 am

richmondam wrote:
Wed Dec 06, 2017 8:53 am
I did look at the wiki and other articles, it all points to prepaying but it seems to be more of a no-brainer to me when the loan balances are 100-300K range. 424K felt a little high to me, but that could just be a psychological angle.
It is not just psychological. One thing to look at is your home equity as a percentage of your net worth. With less expensive homes it is easier to have a paid off home that is a reasonable percentage of your net worth.

There is not a one magic right percentage but if paying of off quickly would mean that more than 50%(?) of your net worth would be in home equity then that would make me feel uncomfortable. If that would be a problem in your situation then it might make sense to just refinance to a shorter mortgage, like a ten year ARM, and pay it off over a longer period of time.

richmondam
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Re: Mortgage Payoff Question in HCOL area

Post by richmondam » Wed Dec 06, 2017 1:17 pm

Good point on % of net worth. If I paid off fully the house would be about half of total net worth.

ryman554
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Re: Mortgage Payoff Question in HCOL area

Post by ryman554 » Wed Dec 06, 2017 5:54 pm

richmondam wrote:
Wed Dec 06, 2017 1:17 pm
Good point on % of net worth. If I paid off fully the house would be about half of total net worth.
Would you rather have your house at half your net worth or pay a fee (let's call it mortgage interest) for the privilege to leverage your primary residence and "gamble" (let's call it invest) on a higher-expected, but certainly more variable return?

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Watty
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Re: Mortgage Payoff Question in HCOL area

Post by Watty » Wed Dec 06, 2017 7:36 pm

richmondam wrote:
Wed Dec 06, 2017 1:17 pm
Good point on % of net worth. If I paid off fully the house would be about half of total net worth.
That is not too bad and if you have been in the house for a while part of the value of the home is likely price appreciation since you bought it.

The paying it off can be a year by year decision too until it is paid off.

richmondam
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Re: Mortgage Payoff Question in HCOL area

Post by richmondam » Thu Dec 07, 2017 10:17 am

Makes sense, to the point about essentially taking a loan through mortgage interest to invest I totally agree. I think what's nagging me is the "cash is king" philosophy.

I think the best approach for me is to take excess capital and split 70/30 toward paying off mortgage and adding to taxable investment account.

Really appreciate all the comments, I love this forum to vet some thinking.

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grabiner
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Re: Mortgage Payoff Question in HCOL area

Post by grabiner » Fri Dec 08, 2017 10:57 pm

richmondam wrote:
Tue Dec 05, 2017 11:48 pm
Hi Everyone,

I'm close to retiring student debt and am now thinking about what's next. After having read the board and running some numbers, I'm definitely onboard with paying off the mortgage. Accelerating payments will allow me to save $150K - 200K in interest if I pay off in the next few years. Current balance is $424K, 30 yr fixed at 4%. We live in a HCOL and that mortgage got us a very reasonable house in a decent school district. I don't expect to move anytime soon, so the pressure to save for the next house is not there right now.
Given your high tax rate (33% federal, 5.75% state which I assume is VA given your handle), I wouldn't be in a hurry to pay that mortgage off. The rate is 2.68% after federal tax, 2.53% after federal and state. Extra payments on the mortgage are thus very-long-term bonds yielding 2.53%, and you can buy long-term bonds with a comparable yield Admiral shares of Vanguard Long-Term Tax-Exempt yield 2.44%, which is 2.34% after state tax, and have a shorter duration.

If you want to accelerate paying the mortgage off, the best way is to refinance to a 15-year mortgage. If that is at 3%, it would be 2.01% after federal tax, 1.89% after state and federal, and at that rate, you can earn more interest on muncipal bonds than you would save on additional prepayments. I would recommend this strategy if you can handle the cash flow.
David Grabiner

betablocker
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Re: Mortgage Payoff Question in HCOL area

Post by betablocker » Fri Dec 08, 2017 11:22 pm

richmondam wrote:
Thu Dec 07, 2017 10:17 am
Makes sense, to the point about essentially taking a loan through mortgage interest to invest I totally agree. I think what's nagging me is the "cash is king" philosophy.

I think the best approach for me is to take excess capital and split 70/30 toward paying off mortgage and adding to taxable investment account.

Really appreciate all the comments, I love this forum to vet some thinking.
Every dollar you put into the mortgage yields 4%*(1-your tax rate). It’s just a ridiculously low return and you don’t get the benefit of it until your mortgage is paid off 30 years in the future. You are sacrificing liquidity and investments now for bad return way down the road. Unless you are just way over your head in mortgage debt that’s a bad deal in my mind. Read the Value of Debt in Building Wealth by Thomas Anderson. Debt now helps you stay liquid and invest. I love Bogle heads for many things but some of the anti debt rhetoric is self destructive.

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