"6 Reasons The Rich Should Pay-Off Their Mortgage"

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Hawaiishrimp
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Hawaiishrimp » Tue Jan 09, 2018 9:50 pm

ThePrince wrote:
Tue Jan 09, 2018 9:43 pm
Hawaiishrimp wrote:
Tue Jan 09, 2018 9:22 pm
I will never pay extra to pay off my 15 years fixed mortgage at 2.5%. I think I can do better than 2.5% with my investment. It's financially unwise to pay it off, in my humble opinion, given the opportunity cost. There, I said it.
It’s financially unwise to play arbitrage with interest rates and swapping dollars for quarters on the mortgage interest deduction. Most people will earn a better risk-adjusted rate by paying off their mortgage. The borrower is slave to the lender.
I respectfully disagree. Borrowing at 2.5% is a steal, anyone who can should benefit from this low rate. I made an average of 10% return for all years of my investment so far (of course, past return do not guarantee future return etc. We all know that). Still, I will not change my plan and be unnecessarily over-conservative.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Re: 2 reasons the elderly might pay-off a mortgage

Post by staythecourse » Tue Jan 09, 2018 9:58 pm

Taylor Larimore wrote:
Tue Jan 09, 2018 9:14 pm
The older you are the more sense it makes sense to pay off mortgage.
Sorry, this is not always true. For example (I'm 93), even though I could afford to pay-off my mortgage, I chose to refinance with a larger (low interest) mortgage. Here's why:

* A large part of my net-worth was tied-up in my home doing no one any good until my estate goes thru probate, and the home (that Jack built) is sold. This could take several years.

* By taking out a maximum mortgage and receiving the cash, I was able to start giving my heirs their inheritance in advance. They are delighted which makes us all happy!

Best wishes.
Taylor
One of the few times I am not going to feel bad deviating a thread, but was hoping Taylor could add to why he chose this move to free up equity in the house vs. HELOC vs. reverse home mortgage. Not looking for in depth analysis, but just curious in a person like Taylor's situation why one option would be better then another to accomplish what Taylor did, i.e. free up equity in primary residence so he could gift the cash to future beneficiaries prior to death.

Thanks in advance.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by sport » Tue Jan 09, 2018 10:38 pm

ThePrince wrote:
Tue Jan 09, 2018 9:43 pm
Hawaiishrimp wrote:
Tue Jan 09, 2018 9:22 pm
I will never pay extra to pay off my 15 years fixed mortgage at 2.5%. I think I can do better than 2.5% with my investment. It's financially unwise to pay it off, in my humble opinion, given the opportunity cost. There, I said it.
It’s financially unwise to play arbitrage with interest rates and swapping dollars for quarters on the mortgage interest deduction. Most people will earn a better risk-adjusted rate by paying off their mortgage. The borrower is slave to the lender.
Interest rates are increasing. Within a year or two, CDs will be available that yield more than 2.5%. I would rather be a "slave to the lender" with my money earning 3.5% or 4.0% guaranteed than pay off a 2.5% loan. I did this back in the 1970's when my mortgage was 6.75% and my money market fund was yielding 18%. (18% is not a typo). I ended up paying off the mortgage on schedule with inflated dollars. You are not a "slave" when you have the money to pay off the loan and choose not to do so.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by EddyB » Tue Jan 09, 2018 10:57 pm

Hawaiishrimp wrote:
Tue Jan 09, 2018 9:50 pm
ThePrince wrote:
Tue Jan 09, 2018 9:43 pm
Hawaiishrimp wrote:
Tue Jan 09, 2018 9:22 pm
I will never pay extra to pay off my 15 years fixed mortgage at 2.5%. I think I can do better than 2.5% with my investment. It's financially unwise to pay it off, in my humble opinion, given the opportunity cost. There, I said it.
It’s financially unwise to play arbitrage with interest rates and swapping dollars for quarters on the mortgage interest deduction. Most people will earn a better risk-adjusted rate by paying off their mortgage. The borrower is slave to the lender.
I respectfully disagree. Borrowing at 2.5% is a steal, anyone who can should benefit from this low rate. I made an average of 10% return for all years of my investment so far (of course, past return do not guarantee future return etc. We all know that). Still, I will not change my plan and be unnecessarily over-conservative.
Indeed. If my expected returns were less than my 2.75% mortgage rate (even if it ends up no longer being a deduction), I’d have to rethink a lot more than whether to pay off my mortgage today.

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Re: 2 reasons the elderly might pay-off a mortgage

Post by Taylor Larimore » Tue Jan 09, 2018 11:08 pm

ThePrince wrote:
Tue Jan 09, 2018 9:48 pm
Taylor Larimore wrote:
Tue Jan 09, 2018 9:14 pm
The older you are the more sense it makes sense to pay off mortgage.
Sorry, this is not always true. For example (I'm 93), even though I could afford to pay-off my mortgage, I chose to refinance with a larger (low interest) mortgage. Here's why:

* A large part of my net-worth was tied-up in my home doing no one any good until my estate goes thru probate, and the home (that Jack built) is sold. This could take several years.

* By taking out a maximum mortgage and receiving the cash, I was able to start giving my heirs their inheritance in advance. They are delighted which makes us all happy!

Best wishes.
Taylor
Answer in blue

Won’t that possibly create a burden on your heirs, who have to pay your mortgage when your Estate is working its way through probate? It is true they must continue to (equally) pay the mortgage but I will have given them far more than the mortgage payment which should suffice. Anyway, they have the money.

Unless you live in a remote area, or the market crashes and burns, or your heirs price the house unreasonably, not sure how it may take years to sell your house. Not sure the question. Having been in the real estate business I know it may take a few months or years to sell. That's one reason I am giving them the equity now.
Best wishes.
Taylor
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Taylor Larimore » Tue Jan 09, 2018 11:21 pm

staythecourse wrote:
One of the few times I am not going to feel bad deviating a thread, but was hoping Taylor could add to why he chose this move to free up equity in the house vs. HELOC vs. reverse home mortgage. Not looking for in depth analysis, but just curious in a person like Taylor's situation why one option would be better then another to accomplish what Taylor did, i.e. free up equity in primary residence so he could gift the cash to future beneficiaries prior to death.
Answer: Interest rates are usually a lot lower and longer for a conventional mortgage than a HELOC or a reverse mortgage.

I might add that the equity I took out of my home was invested in Vanguard and has enjoyed a much higher return than my 4% new mortgage so it's been a very good investment -- so far.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Hawaiishrimp » Wed Jan 10, 2018 12:51 am

Taylor Larimore wrote:
Tue Jan 09, 2018 11:21 pm
staythecourse wrote:
One of the few times I am not going to feel bad deviating a thread, but was hoping Taylor could add to why he chose this move to free up equity in the house vs. HELOC vs. reverse home mortgage. Not looking for in depth analysis, but just curious in a person like Taylor's situation why one option would be better then another to accomplish what Taylor did, i.e. free up equity in primary residence so he could gift the cash to future beneficiaries prior to death.
Answer: Interest rates are usually a lot lower and longer for a conventional mortgage than a HELOC or a reverse mortgage.

I might add that the equity I took out of my home was invested in Vanguard and has enjoyed a much higher return than my 4% new mortgage so it's been a very good investment -- so far.

Best wishes.
Taylor
Exactly my thinking. :sharebeer
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Re: 1 Reason Not to Pay-Off a Mortgage

Post by Bacchus01 » Wed Jan 10, 2018 8:44 am

Taylor Larimore wrote:
Fri Jun 03, 2016 7:28 pm
Bogleheads:

Not everyone wants to leave heirs equity in a difficult to sell, mortgage-free home for heirs to squabble over.

When Pat and I were in our 80s, we took out a (low-interest) mortgage on our condo so we could give our heirs our home equity while we were still alive and when they needed it most.

Best wishes.
Taylor
I really like this approach. If we plan to give our children anything as part of our estate, I would MUCH rather give it to them while we are alive and can enjoy it with them than to have them deal with the windfall upon our death.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Call_Me_Op » Wed Jan 10, 2018 8:55 am

jackholloway wrote:
Fri Jun 03, 2016 2:13 pm
Since I am strongly considering paying off my mortgage, I, of course, liked the article.
Since I already have done so some years ago, I likewise liked it. :)
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by BTDT » Wed Jan 10, 2018 9:10 am

My IPS (Investor Policy Statement) is based on SWAN (Sleep Well At Night), so yes I paid off my mortgage and carry no debt. My IPS dictates that if I can't pay cash for something, I really don't need it.... like a Gulfstream G650ER :sharebeer
If past history was all that is needed to play the game of money, the richest people would be librarians.

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Re: 1 Reason Not to Pay-Off a Mortgage

Post by keystone » Wed Jan 10, 2018 9:24 am

Taylor Larimore wrote:
Fri Jun 03, 2016 7:28 pm
Bogleheads:

Not everyone wants to leave heirs equity in a difficult to sell, mortgage-free home for heirs to squabble over.

When Pat and I were in our 80s, we took out a (low-interest) mortgage on our condo so we could give our heirs our home equity while we were still alive and when they needed it most.
Just when I thought I knew there was everything to know about Taylor's philosophy on finances I see this nugget. Thank you for providing this outside the box idea.

staythecourse
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by staythecourse » Wed Jan 10, 2018 8:04 pm

Taylor Larimore wrote:
Tue Jan 09, 2018 11:21 pm
staythecourse wrote:
One of the few times I am not going to feel bad deviating a thread, but was hoping Taylor could add to why he chose this move to free up equity in the house vs. HELOC vs. reverse home mortgage. Not looking for in depth analysis, but just curious in a person like Taylor's situation why one option would be better then another to accomplish what Taylor did, i.e. free up equity in primary residence so he could gift the cash to future beneficiaries prior to death.
Answer: Interest rates are usually a lot lower and longer for a conventional mortgage than a HELOC or a reverse mortgage.

I might add that the equity I took out of my home was invested in Vanguard and has enjoyed a much higher return than my 4% new mortgage so it's been a very good investment -- so far.

Best wishes.
Taylor
Much thanks. Just curious why one product for another to accomplish your goal. Doesn't apply to me, but found it to be an interesting mental exercise. Who knows about the future if it will be useful for me to know this option.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by thx1138 » Wed Jan 10, 2018 8:27 pm

madbrain wrote:
Sun Jun 05, 2016 3:31 am
1) compare to a taxable account
This really depends on your interest rate. I am in the 25% federal tax bracket and 9.3% CA state bracket, ie. 34.3% marginal tax rate. My mortgage is at 3.375%. All of the interest is fully deductible, as long as I'm working - state income tax and property tax alone exceed the standard deduction.
Not anymore. Your SALT deduction is capped at $10K. If you are single your standard deduction is $12K and so indeed the vast majority of your mortgage interest is deductible. If you are married though the standard deduction is $24K and thus the first $14K of mortgage interest (the interest on $414K of loan) is not deductible at all. Thus if you are married you'd need to find a risk free return of 5.13% pre-tax (fed+state) or a CA muni returning 4.5%.

The whole calculus of paying off a mortgage has changed a lot in the past few weeks - especially for married couples living in high tax states. Many are discovering that in the past *all* of their mortgage interest was deductible and now suddenly *none* of it is.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Wed Jan 10, 2018 8:33 pm

thx1138 wrote:
Wed Jan 10, 2018 8:27 pm
madbrain wrote:
Sun Jun 05, 2016 3:31 am
1) compare to a taxable account
This really depends on your interest rate. I am in the 25% federal tax bracket and 9.3% CA state bracket, ie. 34.3% marginal tax rate. My mortgage is at 3.375%. All of the interest is fully deductible, as long as I'm working - state income tax and property tax alone exceed the standard deduction.
Not anymore. Your SALT deduction is capped at $10K. If you are single your standard deduction is $12K and so indeed the vast majority of your mortgage interest is deductible. If you are married though the standard deduction is $24K and thus the first $14K of mortgage interest (the interest on $414K of loan) is not deductible at all. Thus if you are married you'd need to find a risk free return of 5.13% pre-tax (fed+state) or a CA muni returning 4.5%.

The whole calculus of paying off a mortgage has changed a lot in the past few weeks - especially for married couples living in high tax states. Many are discovering that in the past *all* of their mortgage interest was deductible and now suddenly *none* of it is.
In a very real way, you are effectively only able to deduct the mortgage interest that is above and beyond the standard deduction unless you have other deductions like charitable contributions in play as well (both in the past and currently). For instance, a MFJ couple with a $24k standard deduction and $25k of mortgage interest is effectively only able to benefit from $1k of deduction. For many, this greatly reduces the real value of the mortgage interest deduction, and this is amplified further with the now higher standard deduction.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Jan 11, 2018 12:21 am

thx1138 wrote:
Wed Jan 10, 2018 8:27 pm
madbrain wrote:
Sun Jun 05, 2016 3:31 am
1) compare to a taxable account
This really depends on your interest rate. I am in the 25% federal tax bracket and 9.3% CA state bracket, ie. 34.3% marginal tax rate. My mortgage is at 3.375%. All of the interest is fully deductible, as long as I'm working - state income tax and property tax alone exceed the standard deduction.
Not anymore. Your SALT deduction is capped at $10K. If you are single your standard deduction is $12K and so indeed the vast majority of your mortgage interest is deductible. If you are married though the standard deduction is $24K and thus the first $14K of mortgage interest (the interest on $414K of loan) is not deductible at all. Thus if you are married you'd need to find a risk free return of 5.13% pre-tax (fed+state) or a CA muni returning 4.5%.

The whole calculus of paying off a mortgage has changed a lot in the past few weeks - especially for married couples living in high tax states. Many are discovering that in the past *all* of their mortgage interest was deductible and now suddenly *none* of it is.
You are right. The recent law tax change is a huge negative for me and other married homeowners in high tax states.

I think the mortgage interest will still be deductible from state income taxes, though. The increase is only for federal taxes.
I estimated that the tax change would increase my federal taxes by about $2,500 - $3,000 a year. My mortgage interest is about $11,000 .So this tax increase would roughly correspond to the non-deductibility of the mortgage interest.

California is supposedly working on a plan to give a 100% state income tax credit for charitable donations to a state fund, which would provide some relief. We can't really discuss that on the forum so I'll leave it at that. But even if this passes, my property taxes alone are still already over $10K.

I will have to take a closer look at paying off the mortgage now.

I definitely have enough in taxable accounts to pay off the mortgage in full - 188% of the mortgage balance. But this is going to generate taxable gains, in turn incurring capital taxes - gains I was planning to realize only much later, in retirement, presumably in a lower federal tax bracket, possibly without any state income tax if I move out of California eventually (not that I really want to, but it's possibility, I will do it only if I have to).
I have to see how much liquidity I would be left with after accounting for the capital gains taxes. Even after the taxable accounts are raided, there will still be sizeable Roth IRA balances also, but I wouldn't really want to touch those.

There are other factors in play also - we have had quite a few earthquakes lately, with the epicenter close to our home. Some days as many as 5. It might not the most opportune time to pay off the mortgage if the big one is just around the corner - but of course, there is no way to know. We don't know carry earthquake insurance as the cost is very high, and the deductible would be in the hundreds of thousands. And my professional situation at work is not the most stable at the moment. I could be unemployed soon.

So, I'm still going to very hesitant to hit the sell and payoff buttons. It's certainly going to require a lot more thought.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Jan 11, 2018 12:46 am

Adding to my last post - one possibility is paying down the mortgage, rather than paying it off in full, to avoid having to pay any capital gains taxes now. This would reduce, but not eliminate the amount of mortgage interest, and thus soften the tax blow. I would then need to rebalance my retirement accounts of stocks almost completely, since I would be left with nearly 100% stocks in taxable.

Cash flow wise, I know my lender allows recast at no cost - I did one recently last year as my mortgage balance had been aggressively paid down. I could do another recast after doing another paydown, which would lower the minimum monthly payment and thus help potential liquidity issue.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by thx1138 » Thu Jan 11, 2018 8:02 am

madbrain wrote:
Thu Jan 11, 2018 12:46 am
Cash flow wise, I know my lender allows recast at no cost - I did one recently last year as my mortgage balance had been aggressively paid down. I could do another recast after doing another paydown, which would lower the minimum monthly payment and thus help potential liquidity issue.
This is a really important point that sometimes gets overlooked when paying down a mortgage early. If your balance is $120,000 and your monthly payment is $2,000 and you pay $100,000 in January you still owe $2000 every month from February through November. If you miss those payments you are now in default despite the massive early paydown.

The extra insidious problem is now imagine we have a 2008 class meltdown in the housing/mortgage market and there are defaults all over the place. Bank of Greed is desperate to get cash flow on their giant portfolio of now non-performing loans. Time to foreclose on some folks. Who are they going to choose to foreclose on? There is Family Spendthrift who are a year into a 30 yr with a LTV of 79% from their purchase price who lost their jobs, have zero emergency fund and credit card debt up the yin-yang so they can't make their monthly payment anymore. Market just tanked by 40% where they live so the actual LTV is 140% now and foreclosing will do nothing other than have the bank realize a loss. Bank of Greed will just let that mortgage continue to not perform indefinitely, they need to look elsewhere for some near term cash flow.

Bank of Greed now takes a close look at Good Citizen Saver who has massively paid down their mortgage early and is sitting at a 40% LTV but unfortunately has lost their job in the upheaval and other unfortunate events have hit their emergency fund hard so they can't make their monthly payment. After the crash that mortgage is still at worse say 65% LTV. Factoring in the lower price of a foreclosure sale along with all the costs associated and it is still no worse than 75% LTV. That's the house to foreclose on! Bank of Greed will get all their money with ease from that loan and it really isn't their concern that Good Citizen Saver lost essentially all their equity because of a foreclosure sale at the bottom of the market and is now wrapping trash bags around a water heater box so they can have a dry night's rest.

So end result the saver who paid down their mortgage a lot but not completely is the one that will lose their house while the spendthrift with the huge mortgage balance will get to ignore paying anything for a couple of years and then might even get a loan modification and stay in their house. Life is very much not fair!

So what you have done - and are planning to do - is a super critical step if paying down but not paying off a mortgage. Get it recast to a lower monthly payment so that in a crisis you can more easily make those payments and not end up in foreclosure. Many ARMs automatically recast at their adjustment points so one can time large prepayments to take advantage of that.

Always remember - a paid off mortgage (i.e. no more mortgage) is very low risk. Counter-intuitively a paid down mortgage (i.e. low loan to value ratio) is riskier than a brand new mortgage - both because the bank will foreclose on low LTV mortgages before high LTV mortgages and because having paid down the mortgage typically means there is less liquid capital around to deal with a financial crisis.

The whole "pay off, pay down or do nothing" question for a mortgage has always been complicated and rarely has a 100% clear answer. The new tax laws have reshuffled the deck for many. Probably a reevaluation but not immediate action is the best course. The new tax law is presently full of unintended consequences and both the states and congress will likely be passing legislation to "fine tune" its impacts. It is of course pointless to speculate what those changes could be or when if ever they might appear, but it is worth considering that a quick reaction to the change in a financial plan might be overcome by near term future events in subsequent tax law changes.

For us personally we already were considering either a big pay down or a full pay off. We happened to have a recent large infusion of cash that either needed to be invested or be put into the mortgage - so no capital gains to worry about on that money. We also happened to have a 5/5 ARM that was about to adjust near the end of this year and we would likely end up refinancing into a 15 yr fixed instead. So the hypothetical "if investment X was just cash right now would you rebuy investment X" question was instead the literal "you have cash, do you want investment X" and the hypothetical "if you didn't have a mortgage right now would to take one out" question was again closer to the literal "we need to take out a new mortgage" (i.e. refinance). We fell right into the perfect storm of previously all mortgage interest was deductible and now none of it is under the new tax law. That nudged us into deciding to just pay off in full. For most folks the decision is probably less clear and worth a lot of sleeping on it!

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Thu Jan 11, 2018 12:10 pm

madbrain wrote:
Thu Jan 11, 2018 12:21 am
I definitely have enough in taxable accounts to pay off the mortgage in full - 188% of the mortgage balance. But this is going to generate taxable gains, in turn incurring capital taxes - gains I was planning to realize only much later, in retirement, presumably in a lower federal tax bracket, possibly without any state income tax if I move out of California eventually (not that I really want to, but it's possibility, I will do it only if I have to).
I've noticed that many who build this sort of sinking fund, intending to eventually pay off their mortgage with it, seem to do so primarily for the sake of liquidity. In order for this to be truly liquid, this fund is nearly always held in a taxable account. But as you note, this can mean that you would incur substantial capital gains in the event that the investments were sold to pay off the mortgage, which is why it seems that the original purpose of the sinking fund is usually not realized. Joe Saul-Sehy of the Stacking Benjamins podcasts recommends this sinking fund strategy but notes that none of his clients who ever used it actually used the fund to pay off their mortgage. Part of this is almost certainly a belief that the capital is better allocated in investments rather than paying off the mortgage. But if that is the case, then the preferable strategy would have been to invest that capital in tax-advantaged accounts right from the beginning, assuming there was enough tax-advantage space to allow for the capital.

So while this 'sinking fund in taxable to maintain liquidity' strategy is certainly more liquid than just paying down the mortgage as you go, it seems that it often turns out to be significantly less liquid in practice than many originally thought.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Jan 11, 2018 4:09 pm

willthrill81 wrote:
Thu Jan 11, 2018 12:10 pm
madbrain wrote:
Thu Jan 11, 2018 12:21 am
I definitely have enough in taxable accounts to pay off the mortgage in full - 188% of the mortgage balance. But this is going to generate taxable gains, in turn incurring capital taxes - gains I was planning to realize only much later, in retirement, presumably in a lower federal tax bracket, possibly without any state income tax if I move out of California eventually (not that I really want to, but it's possibility, I will do it only if I have to).
I've noticed that many who build this sort of sinking fund, intending to eventually pay off their mortgage with it, seem to do so primarily for the sake of liquidity. In order for this to be truly liquid, this fund is nearly always held in a taxable account. But as you note, this can mean that you would incur substantial capital gains in the event that the investments were sold to pay off the mortgage, which is why it seems that the original purpose of the sinking fund is usually not realized. Joe Saul-Sehy of the Stacking Benjamins podcasts recommends this sinking fund strategy but notes that none of his clients who ever used it actually used the fund to pay off their mortgage. Part of this is almost certainly a belief that the capital is better allocated in investments rather than paying off the mortgage. But if that is the case, then the preferable strategy would have been to invest that capital in tax-advantaged accounts right from the beginning, assuming there was enough tax-advantage space to allow for the capital.

So while this 'sinking fund in taxable to maintain liquidity' strategy is certainly more liquid than just paying down the mortgage as you go, it seems that it often turns out to be significantly less liquid in practice than many originally thought.
FYI, I never built up my taxable accounts as a "sinking fund" to pay the mortgage - I always intended to pay down the mortgage from cash flow, in 15 years instead of 30.

I maxed out all my tax-advantage space, and I received an inheritance when my father died. That's where most of the money in taxable accounts comes from. It was indeed invested with the assumption that investments would beat the mortgage rate - and they have, handily. The tax law changes the amount by which they need to beat it - the effective rate of the mortgage goes up since interest is no longer deductible.

After the recent recast, our minimum monthly principal & interest payment is only $1500 - about $300 more than the tax & insurance portion.
Bringing it to $0 would be nice, but at what cost ?

No longer having a mortgage would mean our credit scores would go down. This means we may not get as much free travel from credit card signup bonuses. No longer having large brokerage balances means we also miss out on some juicy brokerage transfer bonuses.
Those are costs most people probably don't think about when they think about paying off their mortgage.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by grabiner » Thu Jan 11, 2018 8:37 pm

madbrain wrote:
Thu Jan 11, 2018 12:21 am
You are right. The recent law tax change is a huge negative for me and other married homeowners in high tax states.

I think the mortgage interest will still be deductible from state income taxes, though. The increase is only for federal taxes.
I estimated that the tax change would increase my federal taxes by about $2,500 - $3,000 a year. My mortgage interest is about $11,000 .So this tax increase would roughly correspond to the non-deductibility of the mortgage interest.
This varies by state. In some states, you can only itemize deductions for state taxes if you itemized for federal taxes. This includes the high-tax states of NY and MD. (In CA, where you live, you can itemize deductions for state taxes even if you took the federal standard deduction.)
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by sport » Thu Jan 11, 2018 9:13 pm

madbrain wrote:
Thu Jan 11, 2018 4:09 pm
No longer having a mortgage would mean our credit scores would go down.
We paid off the mortgage on our first house in 1991. We had a mortgage on our second house for about one year, while we waited for the first house to sell. We then paid off the mortgage on the second house. That was 10 years ago. Citi Bank tells me my FICO score is 831 on a scale of 900. So, it seems that having a mortgage loan is not essential for a good FICO score.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Thu Jan 11, 2018 9:14 pm

sport wrote:
Thu Jan 11, 2018 9:13 pm
madbrain wrote:
Thu Jan 11, 2018 4:09 pm
No longer having a mortgage would mean our credit scores would go down.
We paid off the mortgage on our first house in 1991. We had a mortgage on our second house for about one year, while we waited for the first house to sell. We then paid off the mortgage on the second house. That was 10 years ago. Citi Bank tells me my FICO score is 831 on a scale of 900. So, it seems that having a mortgage loan is not essential for a good FICO score.
I'm pretty sure that 850 is the top end for a FICO score, so 831 is stellar.

Nothing I can find indicates that paying off a mortgage has a direct, negative impact on your credit score.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by grabiner » Thu Jan 11, 2018 11:53 pm

willthrill81 wrote:
Thu Jan 11, 2018 9:14 pm
sport wrote:
Thu Jan 11, 2018 9:13 pm
madbrain wrote:
Thu Jan 11, 2018 4:09 pm
No longer having a mortgage would mean our credit scores would go down.
We paid off the mortgage on our first house in 1991. We had a mortgage on our second house for about one year, while we waited for the first house to sell. We then paid off the mortgage on the second house. That was 10 years ago. Citi Bank tells me my FICO score is 831 on a scale of 900. So, it seems that having a mortgage loan is not essential for a good FICO score.
I'm pretty sure that 850 is the top end for a FICO score, so 831 is stellar.
There are many different FICO models, with different score ranges. (And even on different models which top out at 850, the relative scores may not be the same; 750 may be the top 1/3 on one model and the top 1/2 on another. A good score report should say where you are relative to other people.) There are also scores for different purposes; some factors are more important in predicting mortgage defaults than credit-card defaults, so FICO has a mortgage-specific score.

But it is certainly possible to have a high enough score to get the best terms on credit with only credit cards, as long as you use them well: keep balances low, have several open accounts, and don't open new accounts too frequently.
Wiki David Grabiner

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Fri Jan 12, 2018 12:50 am

willthrill81 wrote:
Thu Jan 11, 2018 9:14 pm
sport wrote:
Thu Jan 11, 2018 9:13 pm
madbrain wrote:
Thu Jan 11, 2018 4:09 pm
No longer having a mortgage would mean our credit scores would go down.
We paid off the mortgage on our first house in 1991. We had a mortgage on our second house for about one year, while we waited for the first house to sell. We then paid off the mortgage on the second house. That was 10 years ago. Citi Bank tells me my FICO score is 831 on a scale of 900. So, it seems that having a mortgage loan is not essential for a good FICO score.
I'm pretty sure that 850 is the top end for a FICO score, so 831 is stellar.

Nothing I can find indicates that paying off a mortgage has a direct, negative impact on your credit score.
15 months ago, Amex told me my score was 849 on a scale that topped 850, I clearly had cracked the credit score algorithm.
It's "only" around 810 now that I have been churning cards and done a bunch of manufactured spending. I was under the impression that scoring models took into accounts multiple types of accounts - mortgages, unsecured cards, auto loans, etc and not having any in a given category might penalize you. Perhaps I'm wrong. Or maybe I don't need my score to be that high to continue to churn cards.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by thx1138 » Fri Jan 12, 2018 11:05 am

madbrain wrote:
Fri Jan 12, 2018 12:50 am
15 months ago, Amex told me my score was 849 on a scale that topped 850, I clearly had cracked the credit score algorithm.
Nice!
It's "only" around 810 now that I have been churning cards and done a bunch of manufactured spending.
There is often claimed to be some point at which "it doesn't matter" if any higher. But even at higher scores it has small effects you might not notice. We used an UMB to refinance a few years ago so we were getting direct feedback on the credit score impacts to interest rate vs points paid tables. Our scores were plenty high to "qualify" with ease for a "good" rate but their was still fine tuning. At around 810ish or abouts there was a break point where either the rate nudged up a bit or we had to pay a slightly higher point fee to get the desired rate. One of us had a bunch of card churn from harvesting a lot of zero interest cash advances in years past against a HELOC plus a number of those cards zero balanced were still active. Having too many cards that the companies kept upping the credit limit on unasked meant the *available* (not used, they were zero balance) revolving credit was high enough the score got dinged a few extra points dropping it below 810. As a result we effectively paid about an extra $500 for the mortgage. That was a lot less than the interest we reaped from all the one year zero percent cash advances in the past so we still came out ahead. But it was an eye opener to see some of the fine details in "hidden" costs associated with credit scores that aren't always spelled out to the consumer.
I was under the impression that scoring models took into accounts multiple types of accounts - mortgages, unsecured cards, auto loans, etc and not having any in a given category might penalize you. Perhaps I'm wrong. Or maybe I don't need my score to be that high to continue to churn cards.
Be aware credit score is no longer the single or even dominant factor in qualifying for credit cards with benefits. They now separately check how much card churn you have and whether you've carried balances and I believe even the kinds of cards you've been churning. The credit report is much more than just a score for a credit card company these days. This has become a big deal for the higher benefit cards with extremely careful targeting in both the solicitation and approval process to give the issuer a better chance of making back the money from the benefits. There has been a bit more reporting on this than usual it seems as shareholders have been questioning the huge benefits on some cards that end up causing large hits to earnings in the near term with promises from the issuers they will turn a profit on them in the future. Sapphire being the elephant in the room on this Chase has been disclosing a lot about who they are aiming for and who they are selecting out. High credit score alone doesn't get you a Sapphire anymore and they reject a lot of high credit score applicants. Apparently many other card issuers are following suit.

Sapphire with Chase has a funny one in which financial advisors in branches are no longer allowed to offer up Sapphire to their customers. Those customers can of course apply online and see ads about Sapphire on TV and other places, but they don't want the financial advisors in physical branches advertising it at all to face-to-face customers. Apparently they've determined that people that see face-to-face financial advisors in branches are not the type of credit card consumer likely to give them the return they are looking for.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by inbox788 » Fri Jan 12, 2018 4:53 pm

Hawaiishrimp wrote:
Tue Jan 09, 2018 9:50 pm
ThePrince wrote:
Tue Jan 09, 2018 9:43 pm
Hawaiishrimp wrote:
Tue Jan 09, 2018 9:22 pm
I will never pay extra to pay off my 15 years fixed mortgage at 2.5%. I think I can do better than 2.5% with my investment. It's financially unwise to pay it off, in my humble opinion, given the opportunity cost. There, I said it.
It’s financially unwise to play arbitrage with interest rates and swapping dollars for quarters on the mortgage interest deduction. Most people will earn a better risk-adjusted rate by paying off their mortgage. The borrower is slave to the lender.
I respectfully disagree. Borrowing at 2.5% is a steal, anyone who can should benefit from this low rate. I made an average of 10% return for all years of my investment so far (of course, past return do not guarantee future return etc. We all know that). Still, I will not change my plan and be unnecessarily over-conservative.
I like to arbitrage free money whenever I can, but those opportunities are rare. Additionally, I own some bonds paying less than 2%, and I don't think I'm alone here among those choosing mortgage vs bond.. I wouldn't want to borrow more at a higher rate to invest in lower rate bonds and lose money on a reverse arbitrage. If I wanted to increase risk and borrow money to invest at a higher expected rate of return (which is a good idea for some folks), I can make an adjustment to my AA to achieve similar risk/reward. I'm in the camp treating mortgage as negative bond. YMMV and there is more than one way to skin a cat, plus where you are coming from may matter.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Fri Jan 12, 2018 5:21 pm

The other thing this changes for me is whether to continue to do Mega backdoor Roth. I was able to add $47,727.50 to my 401k last year according to Quicken, between the pre-tax contributions, after-tax non-Roth contributions, and matching contributions. I already did in-plan conversion of those after-tax contributions to Roth.

In light of the higher effective mortgage rate, it may not make as much sense to continue to contribute the max to the after-tax 401k portion.
On the other hand, since I expect a job change this year, and most employers don't allow such contributions, I may want to keep doing it until I no longer can.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Mako52 » Tue Aug 28, 2018 8:13 am

Mortgage payoff seems to be an all or nothing option for those wondering what to do with idle cash.

Why don't more people explore a partial mortgage lump sum pay-down? Every chunk of cash you throw against principal has a decreasing marginal reduction on the principal. For example, using a 4% interest rate on a $500,000 original 30-year mortgage with $400,000 remaining.

Monthly P&I: $2,387
Remaining payments: 245.72 = $586,534 (Total P&I)

In this scenario, why pay down more than $50k? Your marginal interest savings is less than the marginal paydown amount.

Paydown Amount / Marginal Interest Savings
$25k / $29,596 (remaining P&I becomes $556,968)
$50k / $25,733
$75k / $22,381
$100k / $19,444
$125k/ $16,850
$150k / $14,543
$175k / $12,476
$200k / $10,615
$225k / $8,930
$250k / $7,397
$275k / $5,997
$300 k / $4,713

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Tue Aug 28, 2018 11:14 am

Mako52 wrote:
Tue Aug 28, 2018 8:13 am
Mortgage payoff seems to be an all or nothing option for those wondering what to do with idle cash.

Why don't more people explore a partial mortgage lump sum pay-down? Every chunk of cash you throw against principal has a decreasing marginal reduction on the principal. For example, using a 4% interest rate on a $500,000 original 30-year mortgage with $400,000 remaining.

Monthly P&I: $2,387
Remaining payments: 245.72 = $586,534 (Total P&I)

In this scenario, why pay down more than $50k? Your marginal interest savings is less than the marginal paydown amount.

Paydown Amount / Marginal Interest Savings
$25k / $29,596 (remaining P&I becomes $556,968)
$50k / $25,733
$75k / $22,381
$100k / $19,444
$125k/ $16,850
$150k / $14,543
$175k / $12,476
$200k / $10,615
$225k / $8,930
$250k / $7,397
$275k / $5,997
$300 k / $4,713
Principal payments of any amount effectively get a '4% annual return' because that's the interest rate on the mortgage. How much you put down doesn't change that.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by protagonist » Tue Aug 28, 2018 11:37 am

Taylor Larimore wrote:
Fri Jun 03, 2016 2:10 pm
Bogleheads:

Boglehead Jim Dahle has written a very helpful article for wealthy Bogleheads with extra cash who cannot decide whether to pay-off their mortgage or invest in stocks & bonds:

6 Reasons The Rich Should Pay-Off Their Mortgage

Thank you, Jim

Best wishes.
Taylor
" When you are very poor, a little more wealth makes a huge difference in your life economically and psychologically. As you build wealth, that difference gets smaller and smaller. So for a wealthy high income earner, arbitraging a low interest rate against a higher return is simply less useful. Many times these higher earners choose to lower their risk rather than increase their returns."

++++1

This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.

On the other hand, being debt-free with a roof over your head is psychologically priceless, especially in 2008-like scenarios or worse.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by yeahman » Wed Aug 29, 2018 9:40 pm

The diminishing marginal utility of the dollar is more often misapplied than properly so. Don't forget the MARGINAL part! If we're comparing mortgages of equal size, of course, it's a bigger burden on the person with less income. But in general, people's mortgages reflect their incomes. The person with more income tends to have a larger mortgage so that it may be just as burdensome as someone with less income but a smaller mortgage.

As for the famous diminishing return on happiness after $70k, (1) we shouldn't put so much trust in a single study, and (2) I don't see why it should affect investment strategy. If the idea is that the wealthy can afford to be more conservative, it's also true that the wealthy can afford to be less conservative.

To tie these two points together, if you're wealthy, what you do with $1 doesn't matter, but the same cannot be said of $1 million, which, if you're wealthy, is the range we're talking about.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Wed Aug 29, 2018 9:53 pm

protagonist wrote:
Tue Aug 28, 2018 11:37 am
This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.
That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Wed Aug 29, 2018 10:34 pm

willthrill81 wrote:
Wed Aug 29, 2018 9:53 pm
protagonist wrote:
Tue Aug 28, 2018 11:37 am
This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.
That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
The problem with having no bonds and a mortgage is that you can't rebalance when stocks take a dive, IMO. I prefer a stable value fund over TBM, though.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Wed Aug 29, 2018 10:40 pm

madbrain wrote:
Wed Aug 29, 2018 10:34 pm
willthrill81 wrote:
Wed Aug 29, 2018 9:53 pm
protagonist wrote:
Tue Aug 28, 2018 11:37 am
This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.
That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
The problem with having no bonds and a mortgage is that you can't rebalance when stocks take a dive, IMO. I prefer a stable value fund over TBM, though.
It doesn't have to be all or none. While we're aggressively paying off our mortgage, we're also saving about 20% of our gross household income.

I too prefer a good SVF to TBM.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by ThePrince » Wed Aug 29, 2018 11:09 pm

protagonist wrote:
Tue Aug 28, 2018 11:37 am
Taylor Larimore wrote:
Fri Jun 03, 2016 2:10 pm
Bogleheads:

Boglehead Jim Dahle has written a very helpful article for wealthy Bogleheads with extra cash who cannot decide whether to pay-off their mortgage or invest in stocks & bonds:

6 Reasons The Rich Should Pay-Off Their Mortgage

Thank you, Jim

Best wishes.
Taylor
" When you are very poor, a little more wealth makes a huge difference in your life economically and psychologically. As you build wealth, that difference gets smaller and smaller. So for a wealthy high income earner, arbitraging a low interest rate against a higher return is simply less useful. Many times these higher earners choose to lower their risk rather than increase their returns."

++++1

This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.

On the other hand, being debt-free with a roof over your head is psychologically priceless, especially in 2008-like scenarios or worse.

+1

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by oragne lovre » Thu Aug 30, 2018 12:04 am

protagonist wrote:
Tue Aug 28, 2018 11:37 am

On the other hand, being debt-free with a roof over your head is psychologically priceless, especially in 2008-like scenarios or worse.
I couldn't agree with you more.

In days when it is cold or rains heavily, my family and I can stay warm, have a roof of our own over our heads - the feeling is priceless!
The finest, albeit the most difficult, of all human achievements is being reasonable.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Tamales » Thu Aug 30, 2018 12:33 am

madbrain wrote:
Thu Jan 11, 2018 12:46 am

Cash flow wise, I know my lender allows recast at no cost - I did one recently last year as my mortgage balance had been aggressively paid down. I could do another recast after doing another paydown, which would lower the minimum monthly payment and thus help potential liquidity issue.
Hmm, I never heard of a recast before. Sounds interesting. How does the math work?
I presume the lender still ends up getting the same dollars in interest as they would without the recast?

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by EddyB » Thu Aug 30, 2018 12:36 am

oragne lovre wrote:
Thu Aug 30, 2018 12:04 am
protagonist wrote:
Tue Aug 28, 2018 11:37 am

On the other hand, being debt-free with a roof over your head is psychologically priceless, especially in 2008-like scenarios or worse.
I couldn't agree with you more.

In days when it is cold or rains heavily, my family and I can stay warm, have a roof of our own over our heads - the feeling is priceless!
I like the idea, but it seems like a fantasy. Isn’t the relevant difference between a mortgage and property taxes just one of degree?

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Aug 30, 2018 3:01 am

Tamales wrote:
Thu Aug 30, 2018 12:33 am
Hmm, I never heard of a recast before. Sounds interesting. How does the math work?
I presume the lender still ends up getting the same dollars in interest as they would without the recast?
The interest rate does not change. Your minimum monthly payment just goes down. Recast is only possible if you have made prepayments. And each lender may have different guidelines for how much of a prepayment is needed.The maturity date cannot extend past the original maturity date. For our mortgage, our minimum P&I payment went down from $1843 to $1489 a year ago.
How many interest dollars the lender gets depends on how much your payment is. If you recast and make the minimum payment, the lender will make more in interest. If you recast but keep the same payment as you had prior to recast, the total interest you pay will not change.

You can think of it as a refinance at the same interest rate, but with a new lower balance - the current balance on your mortgage. Except the term will not be the typical fixed 30 years or 15 years, but 30 years less the number of months you have already paid into it.
I don't know if recast is allowed with ARMs. I'm not sure it would make sense. Maybe, since recast should be no-fee, or very low fee.
Last edited by madbrain on Thu Aug 30, 2018 3:07 am, edited 2 times in total.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Aug 30, 2018 3:02 am

oragne lovre wrote:
Thu Aug 30, 2018 12:04 am
In days when it is cold or rains heavily, my family and I can stay warm, have a roof of our own over our heads - the feeling is priceless!
That roof may not be yours very long if you fail to pay your property taxes. For us, the monthly property taxes are significantly more than the monthly interest amount. We are keeping the mortgage.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Aug 30, 2018 3:12 am

willthrill81 wrote:
Wed Aug 29, 2018 10:40 pm
madbrain wrote:
Wed Aug 29, 2018 10:34 pm
willthrill81 wrote:
Wed Aug 29, 2018 9:53 pm
protagonist wrote:
Tue Aug 28, 2018 11:37 am
This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.
That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
The problem with having no bonds and a mortgage is that you can't rebalance when stocks take a dive, IMO. I prefer a stable value fund over TBM, though.
It doesn't have to be all or none. While we're aggressively paying off our mortgage, we're also saving about 20% of our gross household income.

I too prefer a good SVF to TBM.
I used to think that way too, but I value the liquidity more at this moment. I'm making the minimum payment on mortgage in order to do annual Mega backdoor Roth and save more money tax-deferred and tax-free. The new tax laws is very unfavorable to us, though, with high property taxes and low mortgage interest amount. Our itemized deductions will be less than half what they used to be, meaning we will take the standard deduction, unless we make enough charitable contributions (more than $4K/year). If we pay down the mortgage, it reduces our ability to deduct charitable contributions, in some way. This could all change when the tax reform expires in 10 years, though. There are no easy decisions here. But at this time, I'm making minimum payment on recast mortgage, and funding maximum in 401 and IRAs, to the tune of >$80k this year between backdoor Roth IRAs and mega backdoor Roth at two different employers. Won't be able to keep that up, though. I will have to sell RSUs as they vest, and spend bonus, to meet expenses. I find it nice to transfer taxable funds to tax-free, though.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by AtlasShrugged? » Thu Aug 30, 2018 6:28 am

One of the biggest advantages I see is in reducing cash flow needs in retirement, especially early retirement. This can lower your "number" significantly.
This ^ X1000. After many years, I am now maxing out my 401K and Roth. I've been thinking about trying to pay off the mortgage for precisely this reason. It effectively removes 10K I would need in withdrawals. For me, that is a game changer.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by abuss368 » Thu Aug 30, 2018 7:52 am

The article was good. However considering it was written in 2016 some of the advice may have changed considering the new tax plan. Specifically the Pease limitations for itemized deductions has been removed.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by JackoC » Thu Aug 30, 2018 9:55 am

willthrill81 wrote:
Wed Aug 29, 2018 9:53 pm

That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
An apparent 'arbitrage' would generally only be the result of an apples to oranges comparison of rates over time. People who believe they are good at trading interest rates should consider doing it for a living. But the fair general analysis would compare low risk bond rates of the same term as the mortgage at the same point in time. The 30yr mortgage rate now is roughly 4.5%. That's for an average term (including principal amortization) of around 18 yrs. the 18yr point on the treasury curve is around 2.88%. Factor in the value of the call (prepayment) option you hold with the mortgage and slight yield premium you can get with govt-like risk in non-treasuries, and there's still no arbitrage. VBTLX (Vang's 'Admiral' TBM fund) has SEC 3.13% with effective maturity 8.4 yrs (the fund holder is short call options some issuers hold in that case).

Tax adds complexity, in that mortgage interest is often state tax deductible (though not in my state, and state income tax rates vary from 0%>10%-ish where it is deductible) and treasury interest is not state taxable. OTOH the value of the mortgage interest deduction has been significantly diluted, for many people, by the recent increase in the standard deduction. Also I assume the conversation starts with people maxing out tax deferred retirement contributions with or without mortgage. Same with basic emergency liquidity: the inability to maintain a sufficient 'emergency fund' without having a mortgage might mean it's necessary to keep a mortgage, doesn't mean it's an 'arbitrage' to have a mortgage.

If you had invested the proceeds of a mortgage in safe bonds of comparable term when mortgage rates were lower, it would generally have been the same. If you speculated on interest rates by investing 30yr mortgage proceeds in shorter duration bonds and won because bond rates are now higher, great. If you really have a 2.5% mortgage (of still long remaining term) there's an implicit loss to pay it back now, relative to a current rate mortgage. But a general rule should compare similar duration at the same point in time, in which case an arbitrage by borrowing at the mortgage rate to invest at the comparable term US govt borrowing rate should not and generally does not exist.

When it comes to borrowing to fund positions in risk assets, that's a matter of risk preference, not one right answer. But it's still not valid to compare your expectation or hope, or the past history of equity returns, to deem a mortgage rate automatically favorable to use as leverage for stocks. And if making the risk preference choice to borrow at a risky rate to leverage risk assets, there's also a question whether a mortgage would be cheapest way to do that (equity index futures implied borrowing rates are roughly 2.30% recently but subject to continuous change, a need for active liquidity management with futures, and a different tax situation, so a 4.5% 30yr mortgage could be more a practical way to do it, not a cheaper way necessarily though).

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willthrill81
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by willthrill81 » Thu Aug 30, 2018 9:58 am

madbrain wrote:
Thu Aug 30, 2018 3:12 am
willthrill81 wrote:
Wed Aug 29, 2018 10:40 pm
madbrain wrote:
Wed Aug 29, 2018 10:34 pm
willthrill81 wrote:
Wed Aug 29, 2018 9:53 pm
protagonist wrote:
Tue Aug 28, 2018 11:37 am
This is a huge point overlooked by many people with money, and applies to many scenarios. The improvement in lifestyle you experience with more money, assuming you have "enough" already, is often not worth the hassle or risk of making it. The improvement in lifestyle beyond a certain point is trivial, unless you make A LOT more money, which probably takes either a lot more risk or a lot of work, and even so, you may not be any happier in the long run or live a significantly better lifestyle.
That's why I wonder why so many here brag about their mortgage rate being 2.5% while they are still putting money into TBM. Yes, there's probably some arbitrage there, but is it really enough to make it worthwhile? Simplifying my life is certainly worth more than a few basis points to me, but clearly it isn't to others.
The problem with having no bonds and a mortgage is that you can't rebalance when stocks take a dive, IMO. I prefer a stable value fund over TBM, though.
It doesn't have to be all or none. While we're aggressively paying off our mortgage, we're also saving about 20% of our gross household income.

I too prefer a good SVF to TBM.
I used to think that way too, but I value the liquidity more at this moment. I'm making the minimum payment on mortgage in order to do annual Mega backdoor Roth and save more money tax-deferred and tax-free. The new tax laws is very unfavorable to us, though, with high property taxes and low mortgage interest amount. Our itemized deductions will be less than half what they used to be, meaning we will take the standard deduction, unless we make enough charitable contributions (more than $4K/year). If we pay down the mortgage, it reduces our ability to deduct charitable contributions, in some way. This could all change when the tax reform expires in 10 years, though. There are no easy decisions here. But at this time, I'm making minimum payment on recast mortgage, and funding maximum in 401 and IRAs, to the tune of >$80k this year between backdoor Roth IRAs and mega backdoor Roth at two different employers. Won't be able to keep that up, though. I will have to sell RSUs as they vest, and spend bonus, to meet expenses. I find it nice to transfer taxable funds to tax-free, though.
You may not be doing this, but I would urge you to not let the 'tax tail' wag the 'investment dog' too much.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Small Law Survivor
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Small Law Survivor » Thu Aug 30, 2018 10:19 am

Yup, did it last year - was a HELOC, had a $90,000 outstanding balance. Walked into bank that held the HELOC with a check for full balance. Felt good. Still feels good.

And, I did this before I learned that new tax law eliminated deduction for HELOC loans, which was only conceivable basis for maintaining it.

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Cycle
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Cycle » Thu Aug 30, 2018 10:42 am

One reason the not-yet rich should own an inexpensive house outright is it will allow them to save a large portion of their income.

The BMW or Birkin bag for me is a 70%+ net savings rate.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Earl Lemongrab » Thu Aug 30, 2018 1:31 pm

What does a paid-off house have to do with a financial crisis? Other than reduce your liquid assets? It's not like they call mortgages when there's a stock market dive.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Aug 30, 2018 2:06 pm

willthrill81 wrote:
Thu Aug 30, 2018 9:58 am
You may not be doing this, but I would urge you to not let the 'tax tail' wag the 'investment dog' too much.
Since taxes are my #1 expense by a long shot, I do everything I can to minimize them. I don't think doing that' works against my investments - rather the contrary, since tax laws favors investment income vs work income. I also don't consider my home an investment, even though it has appreciated significantly. I still consider it a living expense mainly, and the P&I mortgage is only one piece of that - less than half the housing costs.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Thu Aug 30, 2018 2:07 pm

Earl Lemongrab wrote:
Thu Aug 30, 2018 1:31 pm
What does a paid-off house have to do with a financial crisis? Other than reduce your liquid assets? It's not like they call mortgages when there's a stock market dive.
+1 . Lenders also don't call your mortgage when you get laid off. The liquidity is even more valuable in that case.

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