Out of Stocks to Pay Off Mortgage

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delamer
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Re: Out of Stocks to Pay Off Mortgage

Post by delamer » Mon Dec 03, 2018 10:10 pm

pdavi21 wrote:
Mon Dec 03, 2018 5:54 pm
delamer wrote:
Mon Dec 03, 2018 5:46 pm
You are missing the point of insurance. It designed to provide coverage against catastrophic loss.
Which I don't need or want...
My insurance is the fact that I can afford to rent or buy another house plus the 1000 compounded I put away every year into my AA.
We can agree to disagree on this. We are off topic anyway.
Towards the OP's question, the option to go without property insurance (or reduce / change coverage) becomes available.
Whether it's prudent or not to do so is irrelevant.
It is not off topic/irrelevant because you are saying it is a reason to pay off a mortgage.

And I am saying that you are wrong.

And you are the one who brought it up.
Last edited by delamer on Mon Dec 03, 2018 10:15 pm, edited 1 time in total.

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grabiner
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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Mon Dec 03, 2018 10:12 pm

dknightd wrote:
Mon Dec 03, 2018 7:38 pm
Edit: our Mortgage is at 3.25%. I'd like to have it gone. But financially I'm guessing it makes sense for me to hold it. But I could be wrong.
If the interest is not deductible and you are maxing out your retirement accounts, then paying it off gives you the same return as investing in Admiral shares of Vanguard Long-Term Tax-Exempt. That is, paying off the mortgage breaks even if you choose not to take much more risk; you can then decide to take more risk, whether you pay down the mortgage or not.
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Tue Dec 04, 2018 7:40 am

z3r0c00l wrote:
Mon Dec 03, 2018 9:01 pm
Admiral wrote:
Mon Dec 03, 2018 7:23 pm
z3r0c00l wrote:
Mon Dec 03, 2018 7:14 pm
I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.
This tired chestnut needs to be retired. It's not a proper comparison.

Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
I don't understand at all. How is not paying off a mortgage on your home to keep stocks any different from adding a mortgage to your home to buy stocks? The end result is identical, you wind up with a mortgage and stocks.

I wasn't talking about some kind of investing on margin with the home as collateral.
It is much different, despite the "end result" being the same. When you get a mortgage against a fully-owned property, you are then given cash. Let's say you invest and lose the money. The result is you still must pay your debt, but have no liquidity, and therefore may lose the house if you cannot pay (job loss, whatever).

Now consider the OP's situation, you have a mortgage and lots of liquidity. You have debt, true, but cannot lose your home because of loss (investment loss, job loss etc).

I suppose it's possible that in the first situation you could take a mortgage and then put the money aside and not invest it to mitigate against loss. But then what would be the point of taking the loan in the first place?

Admiral
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Tue Dec 04, 2018 7:47 am

ThrustVectoring wrote:
Mon Dec 03, 2018 7:17 pm
Admiral wrote:
Mon Dec 03, 2018 5:45 pm
ThrustVectoring wrote:
Mon Dec 03, 2018 3:22 pm
Admiral wrote:
Mon Dec 03, 2018 12:14 pm
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
How many years remaining is crucial for the exact opposite reason. Owing money on a mortgage has option value on uncertainty over long-term inflation and future interest rates. If interest rates shoot up, you can pocket some free money by buying higher-yielding bonds and using those to pay your later mortgage obligations. You're essentially short the ten-year treasury with a call option to close out the position at par via refinancing or prepayment. And the value of this position depends on how many years are remaining on the mortgage.

Like, I suspect you'd be more likely to tell someone to pay off a mortgage with 30 years remaining than 3, where I'd suggest the exact opposite.
What I would advise would be to make or save the most money possible while preserving liquidity. If one is at the tail end of a long mortgage, a small fraction of each month's payment goes to interest. At such a time, it may not be worth the small savings to lock up that money in the house...you're essentially just paying monthly for something instead of buying it outright. It depends on the investment rates available at the time. Clearly if I cannot reasonably expect to beat my loan rate, then paying it off is a better deal (ignoring liquidity). But that's true in year 3 or year 29.
If you throw an extra $1000 at a mortgage that's at 4.5%, you get an extra $45 per year until the mortgage is paid off. $45/yr per $1000 is either a worthwhile rate of return or not, whether you're paying a lot in interest or not on your mortgage doesn't matter.

Meanwhile, you're locking in that rate of return over the remaining time of the mortgage. A given interest rate can simultaneously be fantastic for locking in your money over a short period of time, decent over like 5 years, and a terrible idea over 30 years. If you believe that the yield curve exists for good reason, then the longer duration you have left on the mortgage the less you should want to pay it down.
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.

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Re: Out of Stocks to Pay Off Mortgage

Post by ThrustVectoring » Tue Dec 04, 2018 1:59 pm

Admiral wrote:
Tue Dec 04, 2018 7:47 am
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
You get the savings immediately, since it immediately changes your existing mortgage payments to send an extra $45/yr to principle instead of interest. Also, if you prepay a significant enough amount of the mortgage, many processors will let you do a free recast of the mortgage (not refinance) which simply takes your current principle and generates a new amortization schedule over the remaining timeframe. Also all investments are in future inflated dollars, so it's a moot point - and anyhow, the savings are automatically "reinvested" by being automatically applied as principle reduction.

And uhh, just because the investment doesn't give you cash in your pocket doesn't mean you haven't earned money. It's just unrealized gains. If you bought the S&P 500 at $1300 and it's currently at $2600, have you not doubled your money? If your mortgage had $200,000 outstanding and now has $199,955 outstanding, have you not become $45 richer?
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Tue Dec 04, 2018 2:14 pm

ThrustVectoring wrote:
Tue Dec 04, 2018 1:59 pm
Admiral wrote:
Tue Dec 04, 2018 7:47 am
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
You get the savings immediately, since it immediately changes your existing mortgage payments to send an extra $45/yr to principle instead of interest. Also, if you prepay a significant enough amount of the mortgage, many processors will let you do a free recast of the mortgage (not refinance) which simply takes your current principle and generates a new amortization schedule over the remaining timeframe. Also all investments are in future inflated dollars, so it's a moot point - and anyhow, the savings are automatically "reinvested" by being automatically applied as principle reduction.

And uhh, just because the investment doesn't give you cash in your pocket doesn't mean you haven't earned money. It's just unrealized gains. If you bought the S&P 500 at $1300 and it's currently at $2600, have you not doubled your money? If your mortgage had $200,000 outstanding and now has $199,955 outstanding, have you not become $45 richer?
This makes no sense. We're not discussing net worth or "becoming ritcher" is some metaphysical sense.

Look:

My mortgage payment is $1,000 per month, fixed.

I can pay $1,000 per month, or I can pay $1045 per month, with the $45 going to principal. That is not "savings" in any real sense. I don't have the $45, nor do I have access to it. It's illiquid debt reduction. If the market tanked and I had to sell at a loss, would you say I had saved they money? No, you would say I invested it and took a loss.

It's perhaps an "investment" only in the sense that it's shaving future interest off the loan. But there is not more money available to me (to invest, or to buy an ice cream cone) until the loan is closed out, at which time my cash flow increases.

Debt reduction can increase net worth, but "saving" implies that you have something that can be spent.

EDIT TO ADD: And, further, have you ever made a prepayment? After you did, did your next payment "immediately change" as you write above? No, it didn't. Not for a fixed rate loan at any rate.

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Re: Out of Stocks to Pay Off Mortgage

Post by Jack FFR1846 » Tue Dec 04, 2018 2:39 pm

I paid my mortgage off long before I ever invested in my first taxable account (around 2002 mortgage payoff vs about 2016 first taxable). But I was always very debt averse and even market averse. Heck, it's why I still have over $350k in savings bonds after selling off $100k over recent years.

I do like the idea of avoiding cap gains by simply diverting saving money from new taxable investments to extra mortgage payments.
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Re: Out of Stocks to Pay Off Mortgage

Post by ThrustVectoring » Tue Dec 04, 2018 2:50 pm

Admiral wrote:
Tue Dec 04, 2018 2:14 pm
ThrustVectoring wrote:
Tue Dec 04, 2018 1:59 pm
Admiral wrote:
Tue Dec 04, 2018 7:47 am
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
You get the savings immediately, since it immediately changes your existing mortgage payments to send an extra $45/yr to principle instead of interest. Also, if you prepay a significant enough amount of the mortgage, many processors will let you do a free recast of the mortgage (not refinance) which simply takes your current principle and generates a new amortization schedule over the remaining timeframe. Also all investments are in future inflated dollars, so it's a moot point - and anyhow, the savings are automatically "reinvested" by being automatically applied as principle reduction.

And uhh, just because the investment doesn't give you cash in your pocket doesn't mean you haven't earned money. It's just unrealized gains. If you bought the S&P 500 at $1300 and it's currently at $2600, have you not doubled your money? If your mortgage had $200,000 outstanding and now has $199,955 outstanding, have you not become $45 richer?
This makes no sense. We're not discussing net worth or "becoming ritcher" is some metaphysical sense.

Look:

My mortgage payment is $1,000 per month, fixed.

I can pay $1,000 per month, or I can pay $1045 per month, with the $45 going to principal. That is not "savings" in any real sense. I don't have the $45, nor do I have access to it. It's illiquid debt reduction. If the market tanked and I had to sell at a loss, would you say I had saved they money? No, you would say I invested it and took a loss.

It's perhaps an "investment" only in the sense that it's shaving future interest off the loan. But there is not more money available to me (to invest, or to buy an ice cream cone) until the loan is closed out, at which time my cash flow increases.

Debt reduction can increase net worth, but "saving" implies that you have something that can be spent.

EDIT TO ADD: And, further, have you ever made a prepayment? After you did, did your next payment "immediately change" as you write above? No, it didn't. Not for a fixed rate loan at any rate.
Please re-read the sentence you underlined. You get the benefit immediately, just in the form of additional illiquid pre-payments to the principle. If you dump $12,000 one-time into a mortgage at 4.5% interest, the same fixed $1000 mortgage payment will have $45 less interest charged and thus $45 more applied to principle. This $45 is yours, and under normal accounting rules accrues immediately. Like any other unrealized gain, you cannot spend it immediately, but this doesn't mean that you don't "have" the money. And since the extra $45 is applied to principle, this also is "invested" in paying off your mortgage earlier - you get 4.5% compounding.
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knpstr
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Re: Out of Stocks to Pay Off Mortgage

Post by knpstr » Tue Dec 04, 2018 7:02 pm

grabiner wrote:
Mon Dec 03, 2018 10:07 pm
knpstr wrote:
Mon Dec 03, 2018 2:24 pm
pennylane wrote:
Mon Dec 03, 2018 2:12 pm
You say you have a large 401k and that has enough exposure to the market.

Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.
Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.
The 4.625% return lasts as long as the payment you eliminated. If you pay down a 20-year mortgage to 19 years, you earn 4.625% for 20 years. If you then pay down more to reduce the term to 18 years, you earn 4.625% for 18 years, and so on down to earning 4.625% for one year on the last payment you make to pay it off.

More importantly, the money is not at 0% return after that. The money that you are not using to make mortgage payments becomes available for investing in something else. You can put that money into a bond fund to earn a low-risk return (say, 3.25% on Admiral shares of Vanguard Long-Term Tax-Exempt), or back into the stock market.

Note that you can pay down your mortgage and still keep your stock-market exposure. Sell stocks to pay down your mortgage, and move an equal amount in your 401(k) from bonds to stock. You'll still get the benefit of any stock-market growth, and you will earn less bond interest but pay less mortgage interest. Whether this is a good or bad deal depends on the rates; for you, it would be a good deal if that 4.625% is not tax-deductible. (I considered doing this in 2015, when bond rates were about equal to the after-tax rate on my mortgage, but chose not to do it because I would have had to take a large capital gain.)
Got it. My mistake. I will go out and some 99% interest rate loans so I can start payments on them and make 99% returns for the rest of my life. I knew there were secrets to getting rich. Thanks!
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Re: Out of Stocks to Pay Off Mortgage

Post by z3r0c00l » Tue Dec 04, 2018 7:22 pm

Admiral wrote:
Tue Dec 04, 2018 7:40 am
z3r0c00l wrote:
Mon Dec 03, 2018 9:01 pm
Admiral wrote:
Mon Dec 03, 2018 7:23 pm
z3r0c00l wrote:
Mon Dec 03, 2018 7:14 pm
I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.
This tired chestnut needs to be retired. It's not a proper comparison.

Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
I don't understand at all. How is not paying off a mortgage on your home to keep stocks any different from adding a mortgage to your home to buy stocks? The end result is identical, you wind up with a mortgage and stocks.

I wasn't talking about some kind of investing on margin with the home as collateral.
It is much different, despite the "end result" being the same. When you get a mortgage against a fully-owned property, you are then given cash. Let's say you invest and lose the money. The result is you still must pay your debt, but have no liquidity, and therefore may lose the house if you cannot pay (job loss, whatever).

Now consider the OP's situation, you have a mortgage and lots of liquidity. You have debt, true, but cannot lose your home because of loss (investment loss, job loss etc).

I suppose it's possible that in the first situation you could take a mortgage and then put the money aside and not invest it to mitigate against loss. But then what would be the point of taking the loan in the first place?
You can lose your home for failure to pay mortgage too.

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grabiner
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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Tue Dec 04, 2018 10:58 pm

knpstr wrote:
Tue Dec 04, 2018 7:02 pm
grabiner wrote:
Mon Dec 03, 2018 10:07 pm
knpstr wrote:
Mon Dec 03, 2018 2:24 pm
pennylane wrote:
Mon Dec 03, 2018 2:12 pm
Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.
Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.
The 4.625% return lasts as long as the payment you eliminated. If you pay down a 20-year mortgage to 19 years, you earn 4.625% for 20 years. If you then pay down more to reduce the term to 18 years, you earn 4.625% for 18 years, and so on down to earning 4.625% for one year on the last payment you make to pay it off.

More importantly, the money is not at 0% return after that. The money that you are not using to make mortgage payments becomes available for investing in something else. You can put that money into a bond fund to earn a low-risk return (say, 3.25% on Admiral shares of Vanguard Long-Term Tax-Exempt), or back into the stock market.

Note that you can pay down your mortgage and still keep your stock-market exposure. Sell stocks to pay down your mortgage, and move an equal amount in your 401(k) from bonds to stock. You'll still get the benefit of any stock-market growth, and you will earn less bond interest but pay less mortgage interest. Whether this is a good or bad deal depends on the rates; for you, it would be a good deal if that 4.625% is not tax-deductible. (I considered doing this in 2015, when bond rates were about equal to the after-tax rate on my mortgage, but chose not to do it because I would have had to take a large capital gain.)
Got it. My mistake. I will go out and some 99% interest rate loans so I can start payments on them and make 99% returns for the rest of my life. I knew there were secrets to getting rich. Thanks!
What is missing here is the cost of taking the loan. If you borrow money at a high rate, there is a substantial cost; if you then pay off that loan, you get an equal benefit, so you only break even.

In isolation, you don't want to take out a 4.625% loan, as that is higher than you can earn on your low-risk investments. For example, if you hold some bonds, it doesn't make sense to borrow at 4.625% to buy stock; just sell some bonds instead. (If you are 100% stock and still more risk-tolerant, you can buy on margin and pay a higher interest rate than the rate on low-risk bonds, but this isn't usually a good deal.)

But taking out a 4.625% loan to get something that is beneficial to have, such as a house or a college degree, may be a good idea; it costs money for some other benefit. You would prefer to pay down the loan at 4.625%, but you may not be able to, or there may be too great a cost (using up your liquid funds, missing out on 401(k) contributions). When you do have the opportunity to pay down the loan without a great cost, it makes sense to pay down.
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Wed Dec 05, 2018 9:38 am

z3r0c00l wrote:
Tue Dec 04, 2018 7:22 pm
Admiral wrote:
Tue Dec 04, 2018 7:40 am
z3r0c00l wrote:
Mon Dec 03, 2018 9:01 pm
Admiral wrote:
Mon Dec 03, 2018 7:23 pm
z3r0c00l wrote:
Mon Dec 03, 2018 7:14 pm
I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.
This tired chestnut needs to be retired. It's not a proper comparison.

Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
I don't understand at all. How is not paying off a mortgage on your home to keep stocks any different from adding a mortgage to your home to buy stocks? The end result is identical, you wind up with a mortgage and stocks.

I wasn't talking about some kind of investing on margin with the home as collateral.
It is much different, despite the "end result" being the same. When you get a mortgage against a fully-owned property, you are then given cash. Let's say you invest and lose the money. The result is you still must pay your debt, but have no liquidity, and therefore may lose the house if you cannot pay (job loss, whatever).

Now consider the OP's situation, you have a mortgage and lots of liquidity. You have debt, true, but cannot lose your home because of loss (investment loss, job loss etc).

I suppose it's possible that in the first situation you could take a mortgage and then put the money aside and not invest it to mitigate against loss. But then what would be the point of taking the loan in the first place?
You can lose your home for failure to pay mortgage too.
Not if you have sufficient liquidity, you can't. And therein lies the difference, and why the comparison is imprecise.

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Re: Out of Stocks to Pay Off Mortgage

Post by Tamarind » Wed Dec 05, 2018 10:45 am

If it were me I would likely divert new money from taxable to making extra principle payments.

I might or might not sell part of the taxable account to make a big prepayment, depending on taxes. For me I would be very reluctant to incur any CG tax at all and would probably limit it to the amount of lots I could take a loss on, but you are in a much higher tax bracket so your math will be different.

You might even be able to do a low-cost refinance with or without a lump sum payment that would reduce your interest rate and shorten your term. Earlier this year I got a 5/1 10 year ARM at 3.09% with $300 in fees. Rates have gone up since then but are still sub-4% at the lender I used.

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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Wed Dec 05, 2018 12:18 pm

Have we heard back from the OP?

I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.

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Re: Out of Stocks to Pay Off Mortgage

Post by charlieg1 » Wed Dec 05, 2018 12:56 pm

Admiral wrote:
Mon Dec 03, 2018 12:14 pm

Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
The remaining term / how much is interest vs. principal is irrelevant. The relevant numbers are the rate and remaining balance.
Admiral wrote:
Mon Dec 03, 2018 7:23 pm
Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
It is the same decision as anyone who purchases or refinances a home w/ a mortgage and yet still plans to invest while they have a mortgage. Otherwise, no one would invest until they completely paid off their mortgage.
Admiral wrote:
Tue Dec 04, 2018 7:47 am
ThrustVectoring wrote:
Mon Dec 03, 2018 7:17 pm

If you throw an extra $1000 at a mortgage that's at 4.5%, you get an extra $45 per year until the mortgage is paid off. $45/yr per $1000 is either a worthwhile rate of return or not, whether you're paying a lot in interest or not on your mortgage doesn't matter.

Meanwhile, you're locking in that rate of return over the remaining time of the mortgage. A given interest rate can simultaneously be fantastic for locking in your money over a short period of time, decent over like 5 years, and a terrible idea over 30 years. If you believe that the yield curve exists for good reason, then the longer duration you have left on the mortgage the less you should want to pay it down.
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
It is exactly correct. Just because the monthly payment did not change doesn't mean you didn't realize the gain from partially paying off the debt. The savings is also not in the future - the extra money you paid earns your mortgage rate immediately.
Admiral wrote:
Wed Dec 05, 2018 12:18 pm

I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
The rate of return on the house/asset is irrelevant - whether you prepay the mortgage or invest, you still own the house and still realize the return. The only decision is between the mortgage rate and the expected return of your investment (with some accounting for illiquidity of the house and risk of the alternative investment).

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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Wed Dec 05, 2018 3:01 pm

charlieg1 wrote:
Wed Dec 05, 2018 12:56 pm
Admiral wrote:
Mon Dec 03, 2018 12:14 pm

Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
The remaining term / how much is interest vs. principal is irrelevant. The relevant numbers are the rate and remaining balance.
Admiral wrote:
Mon Dec 03, 2018 7:23 pm
Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
It is the same decision as anyone who purchases or refinances a home w/ a mortgage and yet still plans to invest while they have a mortgage. Otherwise, no one would invest until they completely paid off their mortgage.
Admiral wrote:
Tue Dec 04, 2018 7:47 am
ThrustVectoring wrote:
Mon Dec 03, 2018 7:17 pm

If you throw an extra $1000 at a mortgage that's at 4.5%, you get an extra $45 per year until the mortgage is paid off. $45/yr per $1000 is either a worthwhile rate of return or not, whether you're paying a lot in interest or not on your mortgage doesn't matter.

Meanwhile, you're locking in that rate of return over the remaining time of the mortgage. A given interest rate can simultaneously be fantastic for locking in your money over a short period of time, decent over like 5 years, and a terrible idea over 30 years. If you believe that the yield curve exists for good reason, then the longer duration you have left on the mortgage the less you should want to pay it down.
This is just not correct. You don't "get an extra $45 per year until the mortgage is paid off." You realize ZERO ACTUAL savings until the mortgage is paid in full, because the payment does not change month to month or year to year. The savings is in the future, in inflated dollars, so it's actually a smaller savings in terms of purchasing power.
It is exactly correct. Just because the monthly payment did not change doesn't mean you didn't realize the gain from partially paying off the debt. The savings is also not in the future - the extra money you paid earns your mortgage rate immediately.
Admiral wrote:
Wed Dec 05, 2018 12:18 pm

I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
The rate of return on the house/asset is irrelevant - whether you prepay the mortgage or invest, you still own the house and still realize the return. The only decision is between the mortgage rate and the expected return of your investment (with some accounting for illiquidity of the house and risk of the alternative investment).
A number of responses.

First, there' s a distinction between unrealized gain, realized gain, and savings.To wit:
My mortgage is 4% for 15 years, with a payment of $100. I can pay $100. I can also pay $104, putting the $4 to principal. Or, I can pay $100, and invest the $4 at 4%.

Next month, I can sell my investment, in which case I've gained 16 cents (ignoring taxes). But my mortgage payment is still $100. It's true that I am paying less in interest over 15 years, because I have an unrealized gain via debt reduction, but I cannot access the gain to spend, or to save, until the house is paid off. If the house becomes worthless, what is my gain?

Next, we're dealing with straight percentages, but also with a total sum that is reduced over time, or compounds if invested, that the percentage is applied to. That's why the amount of savings varies with where one is in the amortization sked.

I'm going to use a mortgage calculator to show why the duration matters:

I have a $100,000 mortgage for 10 years at 4%. If I pay it off tomorrow (versus paying for 10 years), I am out $100,000 but save $21,494.17 in interest.

Let's now say I have 5 years left. I owe $44,840.29. I could pay it off, and save $3,758, which is my remaining interest through the end of the loan if I make all scheduled payments.

Or I could invest $44,840.29 for 5 years at 4%. Compounding monthly, I've earned $9,909.55, for a total of $54,749.84. (Compounding annually, I've earned $9,714.78). Subtracting the interest I've paid over that time ($9909-$3758) I've still come out ahead.

So, yes, it's all the same percentage, but in one case I have my money invested and compounding, it's liquid, and I have a realized gain (if I want it), whereas in the other, my investment is paying off debt but is not compounding, and it is unrealized and inaccessible. Liquidity matters because that's what gives you the power to take advantage of compounding.

In year 5 (or 10) I can of course begin investing my former mortgage payment. But I'm starting with a smaller amount, adding a litle each month, and my investment has less time to grow.

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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Wed Dec 05, 2018 3:02 pm

Admiral wrote:
Wed Dec 05, 2018 12:18 pm
I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
This argument is irrelevant to the current discussion, because you are not considering selling stocks (or bonds) to buy real estate. If you sell stocks or bonds to pay down a mortgage, you still own the same amount of real estate, and you still get the same benefit of any increase in home prices. (If you pay down your mortgage, you have more home equity, but home equity is the value of the home minus the mortgage, and what happens to the mortgage is independent of home prices.)

If you have a $300K home with a $200K mortgage at 4%, you will pay $8K in interest next year. If you have $200K in investments which happen to return 4%, you will earn $8K on those investments. Thus, if your home doesn't change in value, your net worth won't change. If your home increases in value by 6%, your net worth increases by $18K.

Now, suppose you sell the investments to pay off your mortgage. If your home doesn't change in value, your net worth won't change. If your home increases in value by 6%, your net worth increases by $18K. Thus, in this situation, paying off the mortgage is break-even, whatever happens to home prices.

Similarly, if your investments earn less than the mortgage rate, paying down the mortgage is a net gain, whatever happens to home prices. And if you sell stocks to pay off the mortgage, paying down the mortgage is a trade-off of risk for return, but an equally good or bad trade-off regardless of what happens to housing prices.
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Wed Dec 05, 2018 3:17 pm

grabiner wrote:
Wed Dec 05, 2018 3:02 pm
Admiral wrote:
Wed Dec 05, 2018 12:18 pm
I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
This argument is irrelevant to the current discussion, because you are not considering selling stocks (or bonds) to buy real estate. If you sell stocks or bonds to pay down a mortgage, you still own the same amount of real estate, and you still get the same benefit of any increase in home prices. (If you pay down your mortgage, you have more home equity, but home equity is the value of the home minus the mortgage, and what happens to the mortgage is independent of home prices.)

If you have a $300K home with a $200K mortgage at 4%, you will pay $8K in interest next year. If you have $200K in investments which happen to return 4%, you will earn $8K on those investments. Thus, if your home doesn't change in value, your net worth won't change. If your home increases in value by 6%, your net worth increases by $18K.

Now, suppose you sell the investments to pay off your mortgage. If your home doesn't change in value, your net worth won't change. If your home increases in value by 6%, your net worth increases by $18K. Thus, in this situation, paying off the mortgage is break-even, whatever happens to home prices.

Similarly, if your investments earn less than the mortgage rate, paying down the mortgage is a net gain, whatever happens to home prices. And if you sell stocks to pay off the mortgage, paying down the mortgage is a trade-off of risk for return, but an equally good or bad trade-off regardless of what happens to housing prices.
I was assuming the 200k (or whatever) is invested, not doing nothing. I was making a distinction between investing in something that returns 1-2%, historically, and 7% historically. The latter is better. That's why people with low rates invest and don't pay off their mortgages. I was ignoring short-term returns for the purposes of this discussion.

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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Wed Dec 05, 2018 3:22 pm

Admiral wrote:
Wed Dec 05, 2018 3:01 pm
I'm going to use a mortgage calculator to show why the duration matters:

I have a $100,000 mortgage for 10 years at 4%. If I pay it off tomorrow (versus paying for 10 years), I am out $100,000 but save $21,494.17 in interest.

Let's now say I have 5 years left. I owe $44,840.29. I could pay it off, and save $3,758, which is my remaining interest through the end of the loan if I make all scheduled payments.

Or I could invest $44,840.29 for 5 years at 4%. Compounding monthly, I've earned $9,909.55, for a total of $54,749.84. (Compounding annually, I've earned $9,714.78). Subtracting the interest I've paid over that time ($9909-$3758) I've still come out ahead.
You are missing a term in the math here. If you pay off your mortgage, then the money which would have gone to payments can be invested instead; thus, you save in interest by not making mortgage payments, but you also earn some interest on your later investments. If you invest every month's mortgage payment amount at the same rate as the mortgage, then you will break even compared to paying off the mortgage.

If you pay down your mortgage, then the money which you paid down continues to earn interest at the mortgage rate until the mortgage balance reaches zero. $1000 invested now in a 5-year bond at 4% would become $1217 in five years; $1000 invested in a mortgage payment will eliminate $1217 of your last month's payment five years from now.
So, yes, it's all the same percentage, but in one case I have my money invested and compounding, it's liquid, and I have a realized gain (if I want it), whereas in the other, my investment is paying off debt but is not compounding, and it is unrealized and inaccessible. Liquidity matters because that's what gives you the power to take advantage of compounding.
Except for the compounding, this is a valid argument; it's better to invest at X% in a liquid investment than at X% in an illiquid investment. And there is another advantage of keeping the mortgage; if rates fall, you can refinance.

But risk goes the other way. If you can earn X% on your mortgage prepayment, but an investment which is expected to earn X% would be risky, it is probably worth selling that investment to pay down the mortgage. This is the OP's situation, with a 4.625% non-deductible mortgage.
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Wed Dec 05, 2018 3:29 pm

grabiner wrote:
Wed Dec 05, 2018 3:22 pm
Admiral wrote:
Wed Dec 05, 2018 3:01 pm
I'm going to use a mortgage calculator to show why the duration matters:

I have a $100,000 mortgage for 10 years at 4%. If I pay it off tomorrow (versus paying for 10 years), I am out $100,000 but save $21,494.17 in interest.

Let's now say I have 5 years left. I owe $44,840.29. I could pay it off, and save $3,758, which is my remaining interest through the end of the loan if I make all scheduled payments.

Or I could invest $44,840.29 for 5 years at 4%. Compounding monthly, I've earned $9,909.55, for a total of $54,749.84. (Compounding annually, I've earned $9,714.78). Subtracting the interest I've paid over that time ($9909-$3758) I've still come out ahead.
You are missing a term in the math here. If you pay off your mortgage, then the money which would have gone to payments can be invested instead; thus, you save in interest by not making mortgage payments, but you also earn some interest on your later investments. If you invest every month's mortgage payment amount at the same rate as the mortgage, then you will break even compared to paying off the mortgage.

If you pay down your mortgage, then the money which you paid down continues to earn interest at the mortgage rate until the mortgage balance reaches zero. $1000 invested now in a 5-year bond at 4% would become $1217 in five years; $1000 invested in a mortgage payment will eliminate $1217 of your last month's payment five years from now.
So, yes, it's all the same percentage, but in one case I have my money invested and compounding, it's liquid, and I have a realized gain (if I want it), whereas in the other, my investment is paying off debt but is not compounding, and it is unrealized and inaccessible. Liquidity matters because that's what gives you the power to take advantage of compounding.
Except for the compounding, this is a valid argument; it's better to invest at X% in a liquid investment than at X% in an illiquid investment. And there is another advantage of keeping the mortgage; if rates fall, you can refinance.

But risk goes the other way. If you can earn X% on your mortgage prepayment, but an investment which is expected to earn X% would be risky, it is probably worth selling that investment to pay down the mortgage. This is the OP's situation, with a 4.625% non-deductible mortgage.
Yes, and I noted that! But you are dollar cost averaging, not investing a lump sum. $100,000 invested tomorrow at 4% does not end up the same as $1,000 invested for 100 months at 4%. Right? That's the whole point: the compounding.

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Re: Out of Stocks to Pay Off Mortgage

Post by guilard1 » Wed Dec 05, 2018 3:34 pm

mbasherp wrote:
Mon Dec 03, 2018 12:42 pm
If your taxable account was 2x or 3x the mortgage balance, I'd be more in agreement. I would rather keep the substantial liquid cushion the taxable account represents. If you want to pay off the mortgage from here, direct all new investments other than retirement accounts there and use all dividend distributions for the mortgage as well. I think that's a much more balanced approach.
+1

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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Wed Dec 05, 2018 3:58 pm

Admiral wrote:
Wed Dec 05, 2018 3:17 pm
grabiner wrote:
Wed Dec 05, 2018 3:02 pm
Admiral wrote:
Wed Dec 05, 2018 12:18 pm
I think one other point worth noting is to understand, historically, how home values have fared versus stocks. As per Case and Shiller, in the US, housing has beaten inflation, on average by 1-2% over the last 80 years. The S+P, as we know has returned about 7% after inflation.

Now, this is not an argument against paying off debt. However, it is something to consider when one is considering taking money out of the markets and putting it into a home by paying off a mortgage. It's a guaranteed return (of the mortgage rate) but the value of the underlying asset would have to grow far, far beyond historical averages to be a better deal, long term, than stocks.
This argument is irrelevant to the current discussion, because you are not considering selling stocks (or bonds) to buy real estate. If you sell stocks or bonds to pay down a mortgage, you still own the same amount of real estate, and you still get the same benefit of any increase in home prices. (If you pay down your mortgage, you have more home equity, but home equity is the value of the home minus the mortgage, and what happens to the mortgage is independent of home prices.)
I was assuming the 200k (or whatever) is invested, not doing nothing. I was making a distinction between investing in something that returns 1-2%, historically, and 7% historically. The latter is better. That's why people with low rates invest and don't pay off their mortgages. I was ignoring short-term returns for the purposes of this discussion.
But you aren't considering investing the money in the house; the return on the house doesn't depend on whether you pay off your mortgage, or on what your non-house investments are. You are comparing the following two scenarios:

A: You have a $300K house, $200K mortgage, and $200K in stock.
D: You sell the stock to pay off the mortgage.

D has lower risk than A, and lower expected return; this may be a good or bad deal, depending on your risk tolerance. But whether D is better than A has nothing to do with the return on housing; any change in the value of the house is of the same value in D as in A.

Why did I call the alternatives A and D? Because it's easier to see with the following comparison:

A: You have a $300K house, $200K mortgage, and $200K in stock.
B: You sell the stock to pay off the mortgage, then move $200K in your 401(k) from bonds to stock.
C: You sell the stock to buy bonds.
D: You sell the stock to pay off the mortgage.

Now, you have the choice between A and B, or C and D: is it worth paying off your mortgage while keeping the same amount in the stock market? This depends only on the return from paying off your mortgage, the return on bonds, and the value to you of liquidity. It doesn't depend on what happens to housing values, nor on whether bonds or stocks are likely to earn more than housing values.

Then, once you have decided whether to pay down your mortgage, you can decide how much stock to hold. If you prefer D to C (paying down the mortgage is worthwhile at the same risk level), then you also prefer B to A, so A cannot be the best choice; you should decide between B and D based on your risk tolerance. If you prefer C to D (keeping the mortgage is worthwhile at the same risk level), then you also prefer A to B, so D cannot be the best choice; you should keep the mortgage, and stay with A if that matches your risk tolerance.

My argument on this thread is that the OP should prefer D to C, and B to A, because of a non-deductible mortgage at 4.625%; I don't know the OP's risk tolerance, so I can't choose between A and C, but one of those (or something in between) is better. Conversely, I prefer C to D, because my mortgage rate is 1.79% after tax, and I have chosen A, holding entirely stock in my taxable account.
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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Wed Dec 05, 2018 4:23 pm

Admiral wrote:
Wed Dec 05, 2018 3:29 pm
grabiner wrote:
Wed Dec 05, 2018 3:22 pm
Admiral wrote:
Wed Dec 05, 2018 3:01 pm
I'm going to use a mortgage calculator to show why the duration matters:

I have a $100,000 mortgage for 10 years at 4%. If I pay it off tomorrow (versus paying for 10 years), I am out $100,000 but save $21,494.17 in interest.

Let's now say I have 5 years left. I owe $44,840.29. I could pay it off, and save $3,758, which is my remaining interest through the end of the loan if I make all scheduled payments.

Or I could invest $44,840.29 for 5 years at 4%. Compounding monthly, I've earned $9,909.55, for a total of $54,749.84. (Compounding annually, I've earned $9,714.78). Subtracting the interest I've paid over that time ($9909-$3758) I've still come out ahead.
You are missing a term in the math here. If you pay off your mortgage, then the money which would have gone to payments can be invested instead; thus, you save in interest by not making mortgage payments, but you also earn some interest on your later investments. If you invest every month's mortgage payment amount at the same rate as the mortgage, then you will break even compared to paying off the mortgage.
So, yes, it's all the same percentage, but in one case I have my money invested and compounding, it's liquid, and I have a realized gain (if I want it), whereas in the other, my investment is paying off debt but is not compounding, and it is unrealized and inaccessible. Liquidity matters because that's what gives you the power to take advantage of compounding.
Except for the compounding, this is a valid argument; it's better to invest at X% in a liquid investment than at X% in an illiquid investment.
Yes, and I noted that! But you are dollar cost averaging, not investing a lump sum. $100,000 invested tomorrow at 4% does not end up the same as $1,000 invested for 100 months at 4%. Right? That's the whole point: the compounding.
Except that the compounding benefit doesn't actually show up if you do the math correctly, and that was my point. If you pay off the mortgage, you are dollar-cost averaging your investments over 60 months, so you don't get 60 months of investment return on most of your dollars. But you do get 60 months of interest return on all your dollars, because every dollar paid against the mortgage earned a return of 4% interest until it eliminated the payment, then 4% on the investment. Thus, whether you use a dollar to pay down your mortgage or invest, you will earn 4% on that dollar over the full 60 months.

I checked the math here myself. For a $100,000 5-year mortgage at 4% (interest compounded monthly, for a 4% annual percentage rate), the monthly payment is $1838.43. If you have $100,000 invested at 4% annually, you will have $121,666.29 after five years, and get 21 cents back on your last payment. If you instead use that $100,000 to pay off the mortgage, and invest the $1838.43 which would have been your payment each month at 4%, you have $121,666.50, the same total.

Now, for reasons we have both indicated, I wouldn't recommend paying down a mortgage if things are actually break-even (including an assumption that the investment alternative to the mortgage has a very low risk at the same duration).
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Re: Out of Stocks to Pay Off Mortgage

Post by PaleoWorx » Wed Dec 05, 2018 4:41 pm

i would do it in a heartbeat.

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