Would you pay this mortgage off?

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BashDash
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Would you pay this mortgage off?

Post by BashDash » Tue Aug 07, 2018 1:30 pm

Would you pay this mortgage off? Two stable teacher jobs with two small kids. Thanks!!!


Background info:

Debt:
no student, CC, or car debt ( two healthy cars, one of them just purchased new to drive forever)

current residence debt: 224K at 4% ( taxes 11k)

Tax Filing Status: married, 2 small children
Tax Rate: Each of us have 106k salary
State of Residence: NY
Age: Upper 30s

Tax Deferred in 403b and 457 plans ( 60 stock 40 bond).
Currently maxing the 457 and half of the 457 space.
Him:150k
Her 95k

Roth IRA ( 100% stock index funds ). Currently maxing both.
Him:13k
Her: 13k

Taxable

10k in checking account.
160k in ally savings no penalty cd ( 2% )

130k in Merril Edge.
Mostly large cap stocks and 40% index funds. All future dividends going to index funds.

2 future NYSTRS pensions at age 55 if retired:
Percent of final average salary. NYSTR

College NY 529 plan
60K in vanguard funds and contributing $50 per month.
Vanguard Institutional Total Stock Market Index Fund 70%
Vanguard Total International Stock Index Fund 30%

soccerrules
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Re: Would you pay this mortgage off?

Post by soccerrules » Tue Aug 07, 2018 1:48 pm

short answer -- depends ?
How many years left on Mortgage ?
Do you want to retire early ? (if so when)
what would you do with money if you don't pay off early ?

My quick glance response is -- NO (don't pay early). Make sure you have good EF, you have stable jobs and plan to have decent pensions. I would take remaining cash and invest in market according to your AA.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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StuyPHD
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Re: Would you pay this mortgage off?

Post by StuyPHD » Tue Aug 07, 2018 1:50 pm

Few questions remained unanswered but at first sight i would say no. 4% is an okay interest rate and you can surely come very close to beating it with putting your money into investment assets. (especially in the current rising interest rate environment)
if plan B was any good it would be plan A

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pezblanco
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Re: Would you pay this mortgage off?

Post by pezblanco » Tue Aug 07, 2018 3:01 pm

What is your mix of stocks to bond? Overall are you trying for 60/40? If so, one way to go about this would be to invest 60% of new allocations into taxable into stocks and use the 40% of new bond money to pay off the negative bond of your mortgage (which would if you aren't itemizing give you a 4% tax free return ... far better than the 2% you're getting on the CD or the 2.69% available on fed/state tax free yield of the Vanguard New York Muni Bond Fund VNYUX)

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Toons
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Re: Would you pay this mortgage off?

Post by Toons » Tue Aug 07, 2018 3:03 pm

I would if it were my mortgage
No doubt
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

delamer
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Re: Would you pay this mortgage off?

Post by delamer » Tue Aug 07, 2018 3:08 pm

Assuming that you are using some of the Merrill Edge money, do you know what your capital gains will be?

BashDash
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Re: Would you pay this mortgage off?

Post by BashDash » Tue Aug 07, 2018 3:29 pm

Op here. Thanks for all replies! To answer a few questions. It is a 30 year mortgage opened in 2009. The monthly payment is 1400$ but I typically send in 1900$ as my payment.

A lot of the Merril edge money would be long term capital gains. The index funds are newer investments as I transitioned from individual stocks. The only individual stock money left is the "houses money". Between 40 and 50k is vti and vxus.

delamer
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Re: Would you pay this mortgage off?

Post by delamer » Tue Aug 07, 2018 3:33 pm

BashDash wrote:
Tue Aug 07, 2018 3:29 pm
Op here. Thanks for all replies! To answer a few questions. It is a 30 year mortgage opened in 2009. The monthly payment is 1400$ but I typically send in 1900$ as my payment.

A lot of the Merril edge money would be long term capital gains. The index funds are newer investments as I transitioned from individual stocks. The only individual stock money left is the "houses money". Between 40 and 50k is vti and vxus.

So what would your tax bill be if you sold to pay off the mortgage? Do you pay state income taxes?

BashDash
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Re: Would you pay this mortgage off?

Post by BashDash » Tue Aug 07, 2018 3:44 pm

Last year we received 10k back. It was a bit of an unusual tax year though as wife only worked half year due to maternity leave. Plus I was maxing 403b and 457 to lower emergency fund.

delamer
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Re: Would you pay this mortgage off?

Post by delamer » Tue Aug 07, 2018 3:47 pm

BashDash wrote:
Tue Aug 07, 2018 3:44 pm
Last year we received 10k back. It was a bit of an unusual tax year though as wife only worked half year due to maternity leave. Plus I was maxing 403b and 457 to lower emergency fund.
No, I meant how much additional would you owe in taxes on your capital gains?

For instance, if you sold assets and had $30,000 in long-term capital gains then your federal income taxes would increase by $4500.

JoeRetire
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Re: Would you pay this mortgage off?

Post by JoeRetire » Tue Aug 07, 2018 4:14 pm

BashDash wrote:
Tue Aug 07, 2018 1:30 pm
Would you pay this mortgage off?

current residence debt: 224K at 4% ( taxes 11k)
No I wouldn't.

But I don't have any problems sleeping at night due to having a mortgage. And I consider 4% as cheap money. And my investments have earned far more than 4%. And I like to have maximum liquidity in my portfolio.

But you aren't me. And your situation might be very different.

Why are you contemplating paying of a low-cost mortgage? What are your financial goals and how would paying off this mortgage further them?
The monthly payment is 1400$ but I typically send in 1900$ as my payment.
Why do you send in $500 extra?

BashDash
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Re: Would you pay this mortgage off?

Post by BashDash » Tue Aug 07, 2018 6:24 pm

Op here.

Delamer: I'm not exactly sure how much additional taxes I would owe. I have been trying to understand this area more.

JoeRetire: that makes sense. I know 4% is a good rate and I'm not positive why I am putting 500$ extra each month. Part of the reason is sometimes I'm not sure what to do so I just error on being a little aggressive in getting the mortgage down. Also, I started to dislike the lack of flexibility of a 529 account so I figured why not try and have the mortgage done by the time the kids are in college in 15 years so that I can cash flow the tuition if I choose. Right now I am only putting 40$ a moth in the 529.

Grt2bOutdoors
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Re: Would you pay this mortgage off?

Post by Grt2bOutdoors » Tue Aug 07, 2018 6:31 pm

What is the purpose of the cash?
NYS permits a deduction of up to $10K per married couple in the NYS529Direct Plan. www.nysaves.org
Let's say your kids attend a SUNY, including room and board will cost about $100K each today, assuming no assistance in form of merit/grant aid. This is what I would do - I'd take Uncle Mario up on his offer and take that deduction each year for next 5 years. You can hedge your bet by paying down the mortgage as you are currently doing, at worst you earn 4% (rate of mortgage) or you earn alot more on a weighted basis over the next 10 years (all tax free in the 529 plan).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

mortfree
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Re: Would you pay this mortgage off?

Post by mortfree » Tue Aug 07, 2018 6:36 pm

Your loan balance is too high for me to dump your investments (pay extra taxes) and payoff the house.

I had a paid off home at 39. Two years later I moved and have a mortgage again.

Keep paying the extra towards it and continually re-evaluate.

Just knowing that you could pay it off should be some peace of mind.

Another thing to look at is a basic net worth evaluation. Create a few simple buckets: Retirement savings
Taxable investments
cash savings
House value minus loan amount

Take each bucket and divide by the total net worth x 100 to get your percent for each.

Net worth can be complicated when people start including cars, jewelry, etc. that’s why I recommended simple buckets. YMMV

Nate79
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Re: Would you pay this mortgage off?

Post by Nate79 » Tue Aug 07, 2018 6:44 pm

Why do you have such a large amount in the CD? I would be very tempted to build up cash and use some of the taxable account + the CD to pay off your mortgage. Worst case is you regret it and you can get a mortgage to make yourself feel better. 4% is a nice guaranteed after tax return, especially compared to your before tax 2% CD.

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greg24
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Re: Would you pay this mortgage off?

Post by greg24 » Tue Aug 07, 2018 6:53 pm

BashDash wrote:
Tue Aug 07, 2018 1:30 pm
Tax Deferred in 403b and 457 plans ( 60 stock 40 bond).
Currently maxing the 457 and half of the 457 space.
I would max both of the plans.

The mortgage would be difficult to pay off, so I wouldn't.

delamer
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Re: Would you pay this mortgage off?

Post by delamer » Tue Aug 07, 2018 7:17 pm

BashDash wrote:
Tue Aug 07, 2018 6:24 pm
Op here.

Delamer: I'm not exactly sure how much additional taxes I would owe. I have been trying to understand this area more.

JoeRetire: that makes sense. I know 4% is a good rate and I'm not positive why I am putting 500$ extra each month. Part of the reason is sometimes I'm not sure what to do so I just error on being a little aggressive in getting the mortgage down. Also, I started to dislike the lack of flexibility of a 529 account so I figured why not try and have the mortgage done by the time the kids are in college in 15 years so that I can cash flow the tuition if I choose. Right now I am only putting 40$ a moth in the 529.
You do want to make sure you understand the tax implications before making any decisions.

Hopefully, your brokerage statement shows you the cost basis for each investment.

“Selling price” minus “cost basis” equals “taxable gain” (assuming the selling price is greater than the cost basis).

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Que1999
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Re: Would you pay this mortgage off?

Post by Que1999 » Tue Aug 07, 2018 8:29 pm

I would max out all tax deferred space first. All... adjust your withholdings so you'd bring more cash home in your paychecks.... Living in a high tax state like NY makes this priority #1, even more so if you live in the City which imposes 3.5% city tax on all income, including your taxable accounts. Also, why 60/40 if you and your wife both have secure jobs w/pensions at 55? Should be more aggressive in my opinion... Like 100% stocks lol. Retirement is at least 20 years away from what you said if 55 is your number, and you'll have 2x pensions and social security income so there's really no need to be so conservative. You definitely have the ability to be more aggressive.

I would then continue to max out the Roth IRA if I could. I would also dump some of that CD that's a lot of money tied up not really working for you... 2% is barely keeping up with inflation. Move that over to either your taxable account or use some of it to pay down the mortgage to save interest (check your amortization chart), or just dump it all into high-equity tax-efficient stocks in your taxable account. I'd keep doing the college savings, why not. $50 a month isn't gonna break the bank.

I think paying down the mortgage would be one of the last things I'd do, but depending on how debt-averse you are.... Maybe throw some of that CD into the mortgage payment to cut down years and some of the higher-interest payments until it's to a level your comfortable with. But definitely clean up that CD, throw it into the mortgage or taxable account ASAP.
Last edited by Que1999 on Wed Aug 08, 2018 7:02 am, edited 1 time in total.

sawdust60
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Re: Would you pay this mortgage off?

Post by sawdust60 » Wed Aug 08, 2018 12:06 am

Nate79 wrote:
Tue Aug 07, 2018 6:44 pm
... 4% is a nice guaranteed after tax return, especially compared to your before tax 2% CD.
A reasonable argument if you want to pay it off. And I like the idea of being debt free. One problem with your taxable accounts is the risk that you will not conserve them. Paying off all or part of the mortgage will eliminate that risk.

If you pay off the mortgage, you will have exchanged part of your savings for lower cash outflows of about $20k/year. Will you use all of this to replace your savings? And we have the risk of not replacing the savings.

If you were to adjust your portfolio to a higher percentage of stocks, over what time period? Investing the lower cash outflows over several years might not be a bad thing.

If you want to keep other investments, use the $160k CD to reduce the mortgage balance, continue the $1900 monthly payment for three more years.

jminv
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Re: Would you pay this mortgage off?

Post by jminv » Wed Aug 08, 2018 3:18 am

Why do you have so much of your net worth in a cd that’s just keeping up with inflation? If you plan on keeping money in a cd with a lower rate than your mortgage, then you should apply the cd balance to the mortgage which will go a long way to paying for the mortgage. I would pay the rest down over the normal payments.

grettman
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Re: Would you pay this mortgage off?

Post by grettman » Wed Aug 08, 2018 4:02 am

Toons wrote:
Tue Aug 07, 2018 3:03 pm
I would if it were my mortgage
No doubt
:happy
Ditto. That is if you are maximizing your tax sheltered opportunities.

Others disagree but in my view debt is debt. Don't owe anything to anybody if you can help it.

aristotelian
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Re: Would you pay this mortgage off?

Post by aristotelian » Wed Aug 08, 2018 6:10 am

When in doubt, diversify and do both.

One thing I would not do is sit on $100k+ cash earning less than the mortgage. Pay in off the mortgage gives guaranteed 4% return, stocks give you chance of higher returns. Cash earning less than inflation is the worst option.

Admiral
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Re: Would you pay this mortgage off?

Post by Admiral » Wed Aug 08, 2018 6:27 am

This is your situation:

You are paying down a 4% loan while not maximizing your 457 (or 403b plan, I think you have a typo so it's hard to tell which one), which (with a presumably pre-tax contribution) would save you, what, 22%? Or whatever your marginal federal tax rate is.

This is precisely the wrong thing to do. ALL pre-tax retirement space should be filled before pre-paying a mortgage. Why save 4% way in the future if you can save 22% now, and invest the money? The savings on pre-paying a mortgage are not realized until the loan is paid off.

BashDash
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Re: Would you pay this mortgage off?

Post by BashDash » Wed Aug 08, 2018 8:18 pm

OP here. Thanks for all the detailed replies. Even after 500 posts here I am still learning a ton. I do get the impression that our 60/40 allocation is too conservative given our jobs and stable pension. To be honest, our 60/40 allocating is probably not even 60/40. That is just our retirement accounts.

For some reason I just feel comfortable having the large ally cd even though of course it makes no sense financially. Lately, we have been spending it and loading up our retirement accounts so over time I guess it will go down. We just bought a car cash and didn't have to worry.

Back to the original question I had I think leaving the mortgage as is would probably make the most sense. Even paying the 500$ extra is probably silly. When my kids are older if We feel like paying it off we should be able to and then try and find college with cash flow from work.

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grabiner
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Re: Would you pay this mortgage off?

Post by grabiner » Wed Aug 08, 2018 9:23 pm

BashDash wrote:
Tue Aug 07, 2018 1:30 pm
current residence debt: 224K at 4% ( taxes 11k)
Your mortgage interest is $8960. With $10K state and local taxes, you aren't getting any tax benefit from deductible interest now unless you have $5040 in other deductions (likely charity), and as you pay down the mortgage, you would need even more in deductions to get a benefit. Thus, unless you donate a lot to charity, paying down the mortgage is a risk-free, tax-free 4% return. That is better than the return on long-term bonds, which makes extra mortgage payments a good deal once you have maxed out your tax-deferred savings.

Conversely, if you do donate $10K to charity, your mortgage interest is mostly deductible at about 29% (combined federal and NY tax rate). That makes the after-tax return on paying down the mortgage 2.84%, which isn't as attractive. I wouldn't make extra payments in this situation since you can just about match that on municipal bonds of a shorter duration; Vanguard NY Long-Term Tax-Exempt Admiral yields 2.73% tax free.

Liquidity is still important. You don't want to give up your entire taxable account, or be left with a taxable account with all stock in which selling anything would incur a large capital gain. But if you leave enough taxable space for your cash needs, putting all the rest towards the mortgage makes sense.
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Toons
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Re: Would you pay this mortgage off?

Post by Toons » Thu Aug 09, 2018 3:23 pm

grettman wrote:
Wed Aug 08, 2018 4:02 am
Toons wrote:
Tue Aug 07, 2018 3:03 pm
I would if it were my mortgage
No doubt
:happy
Ditto. That is if you are maximizing your tax sheltered opportunities.

Others disagree but in my view debt is debt. Don't owe anything to anybody if you can help it.
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

smitcat
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Re: Would you pay this mortgage off?

Post by smitcat » Thu Aug 09, 2018 3:25 pm

Toons wrote:
Thu Aug 09, 2018 3:23 pm
grettman wrote:
Wed Aug 08, 2018 4:02 am
Toons wrote:
Tue Aug 07, 2018 3:03 pm
I would if it were my mortgage
No doubt
:happy
Ditto. That is if you are maximizing your tax sheltered opportunities.

Others disagree but in my view debt is debt. Don't owe anything to anybody if you can help it.
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
Debt is a tool to utilize when it makes sense. It can help create wealth just like any tool.

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Toons
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Re: Would you pay this mortgage off?

Post by Toons » Thu Aug 09, 2018 3:27 pm

smitcat wrote:
Thu Aug 09, 2018 3:25 pm
Toons wrote:
Thu Aug 09, 2018 3:23 pm
grettman wrote:
Wed Aug 08, 2018 4:02 am
Toons wrote:
Tue Aug 07, 2018 3:03 pm
I would if it were my mortgage
No doubt
:happy
Ditto. That is if you are maximizing your tax sheltered opportunities.

Others disagree but in my view debt is debt. Don't owe anything to anybody if you can help it.
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
Debt is a tool to utilize when it makes sense. It can help create wealth just like any tool.
I don't have any "Sense"
:mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Admiral
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Re: Would you pay this mortgage off?

Post by Admiral » Thu Aug 09, 2018 4:40 pm

Toons wrote:
Thu Aug 09, 2018 3:23 pm
grettman wrote:
Wed Aug 08, 2018 4:02 am
Toons wrote:
Tue Aug 07, 2018 3:03 pm
I would if it were my mortgage
No doubt
:happy
Ditto. That is if you are maximizing your tax sheltered opportunities.

Others disagree but in my view debt is debt. Don't owe anything to anybody if you can help it.
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
How is having all or most of your money tied up in a single, non-liquid asset that historically has barely beaten inflation a path to wealth creation? I've yet to hear a convincing argument.

My mortgage rate is lower than current bond yields. Do you suggest I pre-pay it just to eliminate the debt faster as a path to wealth creation? And if so please post your math.

I respect that you and many others don't like debt. But don't make the assumption that carrying debt is a barrier to wealth creation. Most large profitable enterprises use debt to create profits and build wealth. It's called bonds.

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welderwannabe
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Re: Would you pay this mortgage off?

Post by welderwannabe » Thu Aug 09, 2018 5:02 pm

Toons wrote:
Thu Aug 09, 2018 3:23 pm
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
I'd pay it off too. I think a lot of recency bias around here. Market looks great and the housing market is roaring. Keeping a mortgage and investing looks like a no brainer.

Any money past maxxing out tax deferred should be thrown at the mortgage. As Dave Ramsey likes to say, if you don't like the feeling of being debt free you can always go get another mortgage later.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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UpsetRaptor
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Re: Would you pay this mortgage off?

Post by UpsetRaptor » Thu Aug 09, 2018 5:08 pm

There's not a "correct" answer to this question, as per usual.

Me personally, at your age and at 4%, I would not liquidate equities to pay it off. In fact, I would not pay the extra $500 monthly principal you are while you still have some 457 space not being filled, I'd focus on that first. Some pros: You're youngish so a longer horizon for those equities to grow, having all that liquidity in taxable can be quite nice sometimes as life events happen, I assume you're sitting on long term capital gains in the taxable you'd take a hit on, and a mortgage is actually a nice inflation hedge which a typical 3 or 4 fund portfolio generally lacks elsewhere.

On the other hand, a guaranteed 4% return is also quite nice, and then there's the psychological aspect of paying it off.

Up to you.

Edit: When you say $1400 monthly payment, I assume that excludes the annual $11k taxes?

Admiral
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Re: Would you pay this mortgage off?

Post by Admiral » Thu Aug 09, 2018 6:16 pm

UpsetRaptor wrote:
Thu Aug 09, 2018 5:08 pm
There's not a "correct" answer to this question, as per usual.

Me personally, at your age and at 4%, I would not liquidate equities to pay it off. In fact, I would not pay the extra $500 monthly principal you are while you still have some 457 space not being filled, I'd focus on that first. Some pros: You're youngish so a longer horizon for those equities to grow, having all that liquidity in taxable can be quite nice sometimes as life events happen, I assume you're sitting on long term capital gains in the taxable you'd take a hit on, and a mortgage is actually a nice inflation hedge which a typical 3 or 4 fund portfolio generally lacks elsewhere.

On the other hand, a guaranteed 4% return is also quite nice, and then there's the psychological aspect of paying it off.

Up to you.

Edit: When you say $1400 monthly payment, I assume that excludes the annual $11k taxes?
Actually there is a correct answer mathematically speaking. It makes zero mathematical or financial sense to pre-pay a 4% debt when one can contribute to a tax-advantaged account and save 22%.

Psychology or emotion also play a part, but don't confuse those with a rational financial decision. The typical question is pre-pay or invest in taxable. Pre-pay or invest in pre-tax is a no brainer.

smitcat
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Re: Would you pay this mortgage off?

Post by smitcat » Thu Aug 09, 2018 6:20 pm

Admiral wrote:
Thu Aug 09, 2018 6:16 pm
UpsetRaptor wrote:
Thu Aug 09, 2018 5:08 pm
There's not a "correct" answer to this question, as per usual.

Me personally, at your age and at 4%, I would not liquidate equities to pay it off. In fact, I would not pay the extra $500 monthly principal you are while you still have some 457 space not being filled, I'd focus on that first. Some pros: You're youngish so a longer horizon for those equities to grow, having all that liquidity in taxable can be quite nice sometimes as life events happen, I assume you're sitting on long term capital gains in the taxable you'd take a hit on, and a mortgage is actually a nice inflation hedge which a typical 3 or 4 fund portfolio generally lacks elsewhere.

On the other hand, a guaranteed 4% return is also quite nice, and then there's the psychological aspect of paying it off.

Up to you.

Edit: When you say $1400 monthly payment, I assume that excludes the annual $11k taxes?
Actually there is a correct answer mathematically speaking. It makes zero mathematical or financial sense to pre-pay a 4% debt when once can contribute to a tax-advantaged account and save 22%.

Psychology or emotion also play a part, but don't confuse those with a rational financial decision. The typical question is pre-pay or invest in taxable. Pre-pay or invest in pre-tax is a no brainer.
Of course you are correct and I agree - I believe we should also be aware that there are folks who do not want debt even if it is a benefit to them.
I have no idea why that is but it has been clearly identified here.
I am just as curious to know why those folks took any debt in the first place - why not just save up and pay cash for a home then?

Nate79
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Re: Would you pay this mortgage off?

Post by Nate79 » Thu Aug 09, 2018 6:29 pm

Admiral wrote:
Thu Aug 09, 2018 6:16 pm
UpsetRaptor wrote:
Thu Aug 09, 2018 5:08 pm
There's not a "correct" answer to this question, as per usual.

Me personally, at your age and at 4%, I would not liquidate equities to pay it off. In fact, I would not pay the extra $500 monthly principal you are while you still have some 457 space not being filled, I'd focus on that first. Some pros: You're youngish so a longer horizon for those equities to grow, having all that liquidity in taxable can be quite nice sometimes as life events happen, I assume you're sitting on long term capital gains in the taxable you'd take a hit on, and a mortgage is actually a nice inflation hedge which a typical 3 or 4 fund portfolio generally lacks elsewhere.

On the other hand, a guaranteed 4% return is also quite nice, and then there's the psychological aspect of paying it off.

Up to you.

Edit: When you say $1400 monthly payment, I assume that excludes the annual $11k taxes?
Actually there is a correct answer mathematically speaking. It makes zero mathematical or financial sense to pre-pay a 4% debt when one can contribute to a tax-advantaged account and save 22%.

Psychology or emotion also play a part, but don't confuse those with a rational financial decision. The typical question is pre-pay or invest in taxable. Pre-pay or invest in pre-tax is a no brainer.
You do not save 22%. You delay the tax bill and the final tax will depend on the tax rate in retirement.

megabad
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Re: Would you pay this mortgage off?

Post by megabad » Thu Aug 09, 2018 6:35 pm

BashDash wrote:
Tue Aug 07, 2018 1:30 pm
Would you pay this mortgage off? Two stable teacher jobs with two small kids. Thanks!!!

current residence debt: 224K at 4% ( taxes 11k)
No I wouldn't. High quality debt instruments of similar or shorter terms are paying nearly 4%. Long term CD rates are approaching 3.5%. This coupled with the fact that you are young, live in an extremely HCOL area, and have more tax-advantage retirement savings space is reason enough for me. Over 20 years I feel that you can do better in a tax advantaged retirement account conservatively invested in index funds.

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Toons
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Re: Would you pay this mortgage off?

Post by Toons » Thu Aug 09, 2018 6:56 pm

welderwannabe wrote:
Thu Aug 09, 2018 5:02 pm
Toons wrote:
Thu Aug 09, 2018 3:23 pm
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
I'd pay it off too. I think a lot of recency bias around here. Market looks great and the housing market is roaring. Keeping a mortgage and investing looks like a no brainer.

Any money past maxxing out tax deferred should be thrown at the mortgage. As Dave Ramsey likes to say, if you don't like the feeling of being debt free you can always go get another mortgage later.
Perfect :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

3funder
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Re: Would you pay this mortgage off?

Post by 3funder » Thu Aug 09, 2018 7:53 pm

soccerrules wrote:
Tue Aug 07, 2018 1:48 pm
short answer -- depends ?
How many years left on Mortgage ?
Do you want to retire early ? (if so when)
what would you do with money if you don't pay off early ?

My quick glance response is -- NO (don't pay early). Make sure you have good EF, you have stable jobs and plan to have decent pensions. I would take remaining cash and invest in market according to your AA.
+1.

randomguy
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Re: Would you pay this mortgage off?

Post by randomguy » Thu Aug 09, 2018 9:09 pm

Toons wrote:
Thu Aug 09, 2018 6:56 pm
welderwannabe wrote:
Thu Aug 09, 2018 5:02 pm
Toons wrote:
Thu Aug 09, 2018 3:23 pm
Perfect.
Debt is a ball and chain when it comes to wealth creation :mrgreen: :mrgreen:
I'd pay it off too. I think a lot of recency bias around here. Market looks great and the housing market is roaring. Keeping a mortgage and investing looks like a no brainer.

Any money past maxxing out tax deferred should be thrown at the mortgage. As Dave Ramsey likes to say, if you don't like the feeling of being debt free you can always go get another mortgage later.
Perfect :mrgreen:
And like much of DR advice totally wrong.😁 Care to tell me anyone that is giving out 3% mortgages like they were 5 years ago? DR advice is tailored for people that have a proven inability to handle money. You should decide if you fit in that group before deciding to follow it or not.

Admiral
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Re: Would you pay this mortgage off?

Post by Admiral » Fri Aug 10, 2018 6:15 am

Nate79 wrote:
Thu Aug 09, 2018 6:29 pm
Admiral wrote:
Thu Aug 09, 2018 6:16 pm
UpsetRaptor wrote:
Thu Aug 09, 2018 5:08 pm
There's not a "correct" answer to this question, as per usual.

Me personally, at your age and at 4%, I would not liquidate equities to pay it off. In fact, I would not pay the extra $500 monthly principal you are while you still have some 457 space not being filled, I'd focus on that first. Some pros: You're youngish so a longer horizon for those equities to grow, having all that liquidity in taxable can be quite nice sometimes as life events happen, I assume you're sitting on long term capital gains in the taxable you'd take a hit on, and a mortgage is actually a nice inflation hedge which a typical 3 or 4 fund portfolio generally lacks elsewhere.

On the other hand, a guaranteed 4% return is also quite nice, and then there's the psychological aspect of paying it off.

Up to you.

Edit: When you say $1400 monthly payment, I assume that excludes the annual $11k taxes?
Actually there is a correct answer mathematically speaking. It makes zero mathematical or financial sense to pre-pay a 4% debt when one can contribute to a tax-advantaged account and save 22%.

Psychology or emotion also play a part, but don't confuse those with a rational financial decision. The typical question is pre-pay or invest in taxable. Pre-pay or invest in pre-tax is a no brainer.
You do not save 22%. You delay the tax bill and the final tax will depend on the tax rate in retirement.
So you'd rather save 4% now than save 22% now, invest that 22% in, say, bonds yielding 2-3% for the next 20-30 years with compounding interest, and then pay the tax when retired? Which, depending on actual income, may be zero? :confused

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welderwannabe
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Re: Would you pay this mortgage off?

Post by welderwannabe » Fri Aug 10, 2018 7:39 am

randomguy wrote:
Thu Aug 09, 2018 9:09 pm
And like much of DR advice totally wrong.😁 Care to tell me anyone that is giving out 3% mortgages like they were 5 years ago? DR advice is tailored for people that have a proven inability to handle money. You should decide if you fit in that group before deciding to follow it or not.
Got it. People who follow advice to pay off their mortgages early have a proven inability to handle money...and I thought I was reasonably successful. :oops:
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

smitcat
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Re: Would you pay this mortgage off?

Post by smitcat » Fri Aug 10, 2018 8:04 am

welderwannabe wrote:
Fri Aug 10, 2018 7:39 am
randomguy wrote:
Thu Aug 09, 2018 9:09 pm
And like much of DR advice totally wrong.😁 Care to tell me anyone that is giving out 3% mortgages like they were 5 years ago? DR advice is tailored for people that have a proven inability to handle money. You should decide if you fit in that group before deciding to follow it or not.
Got it. People who follow advice to pay off their mortgages early have a proven inability to handle money...and I thought I was reasonably successful. :oops:
That is not accurate - there is no direct relationship between paying off a mortgage early and the ability to handle money.
There are methods to utilize math and potential outcomes in optimizing your spendable future incomes.
In our case we did not pay off loans such as this early and did max out tools such as 401K's which deferred taxes. Similar to the OP we are/were in NY when accumulating and deferring so our deferred amounts were in excess of 30% at times.
Next year we will begin Roth conversions and realize a large percent of those 'deferred' savings - so it works in our case.

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welderwannabe
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Re: Would you pay this mortgage off?

Post by welderwannabe » Fri Aug 10, 2018 8:07 am

smitcat wrote:
Fri Aug 10, 2018 8:04 am
That is not accurate - there is no direct relationship between paying off a mortgage early and the ability to handle money.
Apparently my sarcasm was not adequately communicated.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Cycle
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Re: Would you pay this mortgage off?

Post by Cycle » Fri Aug 10, 2018 8:10 am

If you pay it off, the stock market will go up 15% this year, from my experience. If it were me though, I'd pay down the 4% debt, I like being debt free as it increases my savings rate. I'm 35 and 100% FI, so pretty sure I know how to handle money.
Last edited by Cycle on Fri Aug 10, 2018 8:12 am, edited 1 time in total.

smitcat
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Re: Would you pay this mortgage off?

Post by smitcat » Fri Aug 10, 2018 8:11 am

welderwannabe wrote:
Fri Aug 10, 2018 8:07 am
smitcat wrote:
Fri Aug 10, 2018 8:04 am
That is not accurate - there is no direct relationship between paying off a mortgage early and the ability to handle money.
Apparently my sarcasm was not adequately communicated.
I view this forum as a place where people can help each other - my example is based on our exact experience in NY state with a similar situation.

delamer
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Re: Would you pay this mortgage off?

Post by delamer » Fri Aug 10, 2018 10:55 am

welderwannabe wrote:
Fri Aug 10, 2018 8:07 am
smitcat wrote:
Fri Aug 10, 2018 8:04 am
That is not accurate - there is no direct relationship between paying off a mortgage early and the ability to handle money.
Apparently my sarcasm was not adequately communicated.

I feel for you; sarcasm does not seem to translate for many online.

I made what I thought was an obviously sarcastic reply to a really sexist post (in another thread) and MY post was deleted for being sexist.

Live and learn.

(But it was obvious to me that you were bring sarcastic —. the head slap emoji was my first clue.)

bradpevans
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Re: Would you pay this mortgage off?

Post by bradpevans » Fri Aug 10, 2018 2:24 pm

I like to add this question to the mix: once you pay off the mortgage, where do those dollars go the next month?

If the answer is long term investments / retirement accounts, then (to me) that is even more reason NOT to pay the mortgage down but rather to invest. The retirement money will be in there longer than the mortgage.

Being debt free via extra mortgage payments comes with opportunity cost: what might you have done with those dollars instead?

In the long run, if one is disciplined to invest month after month, the market has to beat the mortgage.

If one can *pay off* the mortgage, that might be attractive as it opens up cash flow the next month.
Paying extra ties up more of your money at about 3-4% rate.

JoeRetire
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Re: Would you pay this mortgage off?

Post by JoeRetire » Fri Aug 10, 2018 2:33 pm

welderwannabe wrote:
Fri Aug 10, 2018 7:39 am
randomguy wrote:
Thu Aug 09, 2018 9:09 pm
And like much of DR advice totally wrong.😁 Care to tell me anyone that is giving out 3% mortgages like they were 5 years ago? DR advice is tailored for people that have a proven inability to handle money. You should decide if you fit in that group before deciding to follow it or not.
Got it. People who follow advice to pay off their mortgages early have a proven inability to handle money...and I thought I was reasonably successful. :oops:
That's not what "DR advice is tailored for people that have a proven inability to handle money" means.
Have you ever listened to Dave Ramsey? Surely you don't think his advice is tailored to the majority of folks here?

JoeRetire
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Re: Would you pay this mortgage off?

Post by JoeRetire » Fri Aug 10, 2018 2:38 pm

Cycle wrote:
Fri Aug 10, 2018 8:10 am
I like being debt free as it increases my savings rate.
Most everyone likes to increase their savings rate.

But the question is how much of you money do you wish to make illiquid in order to do that? And how much excess market return are you willing to give up?

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Cycle
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Re: Would you pay this mortgage off?

Post by Cycle » Sat Aug 11, 2018 8:20 am

JoeRetire wrote:
Fri Aug 10, 2018 2:38 pm
Cycle wrote:
Fri Aug 10, 2018 8:10 am
I like being debt free as it increases my savings rate.
Most everyone likes to increase their savings rate.

But the question is how much of you money do you wish to make illiquid in order to do that? And how much excess market return are you willing to give up?
Well my taxable brokerage account which I opened 1 year ago has gains of 2.5% on 100k. It wouldn't surprise me if real market returns were 2% for the next decade.

Paying the mortgage off is a bird in the hand. Putting a lump sum of money into the stock market after a 9 year bull market may not necessarily produce great returns before those funds need to be exchanged for college tuition or other large purchases.

JoeRetire
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Re: Would you pay this mortgage off?

Post by JoeRetire » Sat Aug 11, 2018 2:07 pm

Cycle wrote:
Sat Aug 11, 2018 8:20 am
Well my taxable brokerage account which I opened 1 year ago has gains of 2.5% on 100k.
How would it have done for the 7 or 8 years before that?
It wouldn't surprise me if real market returns were 2% for the next decade.
That would surprise me. I suppose we are all entitled to our own guesses regarding the future.
Paying the mortgage off is a bird in the hand. Putting a lump sum of money into the stock market after a 9 year bull market may not necessarily produce great returns before those funds need to be exchanged for college tuition or other large purchases.
True - it may not necessarily.

Putting the money into your walls will definitely not produce great returns toward college tuition or any purchases, particularly in your 2% rate prediction scenario.

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