Anyone regret paying off mortgage early?

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KlangFool
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Re: Anyone regret paying off mortgage early?

Post by KlangFool » Thu Aug 09, 2018 1:30 pm

sreynard wrote:
Thu Aug 09, 2018 9:38 am
KlangFool wrote:
Wed Aug 08, 2018 10:14 pm
sreynard wrote:
Wed Aug 08, 2018 9:57 pm
grabiner wrote:
Tue Aug 07, 2018 7:44 pm
And this is an important issue. Liquidity is valuable. Paying down (or even paying off) the mortgage reduces your liquid funds available for living expenses, as you may lose access to your home-equity line of credit if you have lost your job.
Except that when I pay off my mortgage in 4 or 5 years, my need for liquidity will immediately drop in half. It is generally really easy to find at least a temporary job paying half as much.
I wouldn't consider money I have invested in the stock market as liquid.
sreynard,

1) What if the recession hit and laid off happened before you pay off the mortgage in 4 to 5 years?

<<I wouldn't consider money I have invested in the stock market as liquid. >>

2) Unless your AA is 100/0, your money would not be 100% invested in the stock market.

3) I have 500K (100% stock) in my taxable account and I have a 300K mortgage. My PITI is about 20K per year. My AA is 61/39. Even if the stock drop 80%, I can last longer if I do not pay off the mortgage.

KlangFool
1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. I will no longer be dependent on any employer. I could retire and never work again. I could be free. Then "At Will" employment will be at both my will and my employers will. Not just one way.

2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. So paying an extra $1000 a month the same, to me, as buying $1000 a month in bonds. I don't look at it as mortgage vs. investing. I look at both as investing. Both have the same effect on my net worth. The difference is in risk and expected return. Only the mortgage option is known.

Let's see, my current asset allocation would be about 110/-10. :P

3) Your $500K in stocks are close to an all time high, probably with a lot of capital gains. Using them to pay off a mortgage now would be to pay with cheap money. If the market really did drop 80%, and especially if you lost your job and were forced to live off your brokerage account, that $20K a year would be with very expensive money.

You are correct, not paying off your mortgage, your savings will last longer. Clearly. But then what? What's the next step? You need to generate an extra $20K per year, over and above your other living expenses. Where is that going to come from once your savings are gone? What's Plan B?

I'm sorry Klang. I just can't comprehend your thinking and you can't comprehend mine. We'll just have to agree to disagree on this.
sreynard,

1) My taxable account is 500K. It generates 10K of dividend every year. Even it drops 80%, it would generate at least 5K per year.

2) My PITI is 20K per year. The TI portion is 5K per year. Even if I pay off the mortgage, I still have to pay 5K per year.

If I do not pay off my mortgage, I only need to generate 10K per year to pay the mortgage.

If I pay off the mortgage, I still need to pay 5K per year.

<<2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. >>

Which does not work when you look at the cash flow.

<<1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. >>

No, after 4 years, you could work part-time. It is not financially independent. Meanwhile, you may not survive if a recession hit over the next 4 years.

You need to survive in order to succeed.

KlangFool

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willthrill81
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Re: Anyone regret paying off mortgage early?

Post by willthrill81 » Thu Aug 09, 2018 4:04 pm

wolf359 wrote:
Thu Aug 09, 2018 1:15 pm
sreynard wrote:
Thu Aug 09, 2018 9:38 am


1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. I will no longer be dependent on any employer. I could retire and never work again. I could be free. Then "At Will" employment will be at both my will and my employers will. Not just one way.

2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. So paying an extra $1000 a month the same, to me, as buying $1000 a month in bonds. I don't look at it as mortgage vs. investing. I look at both as investing. Both have the same effect on my net worth. The difference is in risk and expected return. Only the mortgage option is known.

Let's see, my current asset allocation would be about 110/-10. :P

3) Your $500K in stocks are close to an all time high, probably with a lot of capital gains. Using them to pay off a mortgage now would be to pay with cheap money. If the market really did drop 80%, and especially if you lost your job and were forced to live off your brokerage account, that $20K a year would be with very expensive money.

You are correct, not paying off your mortgage, your savings will last longer. Clearly. But then what? What's the next step? You need to generate an extra $20K per year, over and above your other living expenses. Where is that going to come from once your savings are gone? What's Plan B?

I'm sorry Klang. I just can't comprehend your thinking and you can't comprehend mine. We'll just have to agree to disagree on this.
I don't see why you both can't be right.

1. Klang is correct. While paying DOWN your mortgage, you take a risk because you have fewer liquid funds during the 4 years it takes.

2. Sreynard is correct. After paying OFF your mortgage (at the 4 year mark), your expenses drop significantly and you are FI.

Therefore:

Don't pay down your mortgage directly. Put the extra payments into a "sinking fund" that is asset allocated appropriate to your goal. (You could simply buy reducing CD ladders that all mature 4 years from now. Or you could get a target date fund for 4 years from now, and receive some equity appreciation. Or whatever risk level you find appropriate.)

During the 4 year pay-down period, you have liquidity and avoid the risks Klang mentioned. Should you lose your job, you have an affordable mortgage payment and extra funds to stretch out your "hang time" (your time between jobs without any other financial support.) After the 4 year period, your reap the benefits of fully paying off the mortgage all at once. You can have your cake and eat it, too.
:thumbsup

I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.

The argument that a paid-for home is bad for liquidity because it ties up capital in the home makes no sense to me. Having a paid-for home significantly reduces your financial obligations going forward, so you don't need as much liquidity as you would if you still had a mortgage.
“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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grabiner
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Re: Anyone regret paying off mortgage early?

Post by grabiner » Thu Aug 09, 2018 7:57 pm

willthrill81 wrote:
Thu Aug 09, 2018 4:04 pm
I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.
For a long-term mortgage, you can use a longer-term fund. If there are 15 years left on your mortgage, you could (in theory) buy a portfolio of bonds maturing in 1 to 15 years, so that you would get enough each year to make your mortgage payments. You wouldn't care what happened to interest rates, as the bonds would cover the payments.

A more practical alternative would be to buy a fund such as Vanguard Long-Term Tax-Exempt, which has the same 7-year duration as the mortgage and example bond portfolio. You would then be in a neutral situation with respect to interest rates; if rates rise, your bond portfolio would lose value, but your negative bond portfolio (the mortgage) would gain an equal amount.
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willthrill81
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Re: Anyone regret paying off mortgage early?

Post by willthrill81 » Thu Aug 09, 2018 8:09 pm

grabiner wrote:
Thu Aug 09, 2018 7:57 pm
willthrill81 wrote:
Thu Aug 09, 2018 4:04 pm
I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.
For a long-term mortgage, you can use a longer-term fund. If there are 15 years left on your mortgage, you could (in theory) buy a portfolio of bonds maturing in 1 to 15 years, so that you would get enough each year to make your mortgage payments. You wouldn't care what happened to interest rates, as the bonds would cover the payments.

A more practical alternative would be to buy a fund such as Vanguard Long-Term Tax-Exempt, which has the same 7-year duration as the mortgage and example bond portfolio. You would then be in a neutral situation with respect to interest rates; if rates rise, your bond portfolio would lose value, but your negative bond portfolio (the mortgage) would gain an equal amount.
Good point. Another option would be to ladder Guggenheim BulletShares.
“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

GAAP
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Re: Anyone regret paying off mortgage early?

Post by GAAP » Fri Aug 10, 2018 11:49 am

There's something of an inherent trade-off between the value of pure liquidity (cash in the bank) and future cash-flow improvements (no mortgage payments).

For nearly anyone these days, paying down the mortgage will yield more in absolute terms than a truly liquid cash-equivalent account. It will also be tax-free yield. Using a sinking fund -- particularly if inflation indexed -- offers a reasonable alternative with greater flexibility.

The relative value of pure liquidity vs cash-slow is likely to change over time. As you get closer to retirement, the cash-flow improvements add more net value to your retirement than the investment returns. Your portfolio needs a multiple of the mortgage payment to support keeping the mortgage after retirement. As you get closer to that date, your net portfolio additions have a decreasing effect on total portfolio value. Reducing future outlays by retiring later or paying off the mortgage are both likely to have much more effect.

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