Pay off mortgage with sale of taxable account assets?

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WhiteLightning
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Pay off mortgage with sale of taxable account assets?

Post by WhiteLightning » Wed Aug 28, 2019 8:31 pm

Hello Bogleheads!

My wife and I are seriously considering paying off the remainder of our mortgage with proceeds from selling a portion of the assets in our taxable brokerage account. The mortgage is the only debt we have left and we REALLY like the idea of being completely debt free.

Details:
My wife and I are both in our mid-30s.
We have a 1 year old child.

$250k remaining mortgage balance (26 years left on 30 year fixed, 3.625% interest rate)
$400k approximate home value
We have no plans on moving in the near future

$400k total in taxable brokerage (mostly index funds with a few individual stocks)
-$250k of the 400k would be sold to fund the mortgage pay off
-$50k-60k of long-term capital gains in the $250k

$600k other investments (401Ks, Roth IRAs, HSAs)
-invested at 85/15 stock/bond split

$30k liquid emergency fund

$200k per year household income

Questions:
1. What would be the tax impact of selling the $250k taxable assets and using that to pay off the mortage? Would it just be %15 of the LTCG?
2. Are there any other implications of doing this that I am not seeing? I am aware of the opportunity cost of the $250k being invested in the market.
3. Our overall investment split is 85/15 stock/bond. Once the mortgage is paid off, should I consider shifting my investments more into equities to maintain our equity exposure?

Thanks!

stan1
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Re: Pay off mortgage with sale of taxable account assets?

Post by stan1 » Wed Aug 28, 2019 8:35 pm

How much per year are you currently putting into the taxable account? How many years would it take you to divert that cash into the mortgage and pay it off?

Personally in this case I would pay off the mortgage early with cash flow from your income rather than liquidating investments in a taxable account.

Topic Author
WhiteLightning
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Re: Pay off mortgage with sale of taxable account assets?

Post by WhiteLightning » Wed Aug 28, 2019 9:03 pm

stan1 wrote:
Wed Aug 28, 2019 8:35 pm
How much per year are you currently putting into the taxable account? How many years would it take you to divert that cash into the mortgage and pay it off?

Personally in this case I would pay off the mortgage early with cash flow from your income rather than liquidating investments in a taxable account.
stan1 - That is actually pretty much what we are currently doing. For the past 3 years, we have put an additional $22k per year towards the principal of the mortgage(this is what is left over after tax advantaged contributions). Assuming we would continue to do that every year, we would have the mortgage paid off in about 6 or 7 years.

My wife and I are both just ready to be done with the mortgage. I guess we are just getting too impatient to wait the 6-7 years.

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willthrill81
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Re: Pay off mortgage with sale of taxable account assets?

Post by willthrill81 » Wed Aug 28, 2019 9:06 pm

Selling your fixed income holdings in order to pay off the mortgage sounds very reasonable since your mortgage debt is effectively offsetting an equal amount of your portfolio (e.g. $250k of mortgage debt offsets $250k in your portfolio).

How much the tax impact of this strategy would be depends on how much capital gains you have in the taxable account. You might not have many gains to pay taxes on.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Pay off mortgage with sale of taxable account assets?

Post by delamer » Wed Aug 28, 2019 9:24 pm

Assuming you don’t have a state income tax, you’d need to withdraw about $258,000 to net $250,000 after paying the taxes on your LTCG.

Have you considered refinancing to a 10 year loan? I’d do that rather than spend down 1/4 of my assets.

Regarding #3, if you made no changes after paying off the loan what would your allocation be?

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Re: Pay off mortgage with sale of taxable account assets?

Post by abuss368 » Wed Aug 28, 2019 10:00 pm

Keeping a 30 year mortgage add adding additional principal payments also provides for additional flexibility if times get tough.
John C. Bogle: "Simplicity is the master key to financial success."

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abuss368
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Re: Pay off mortgage with sale of taxable account assets?

Post by abuss368 » Wed Aug 28, 2019 10:01 pm

Consider running a few amortization scenarios to see what works best.
John C. Bogle: "Simplicity is the master key to financial success."

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JoeRetire
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Re: Pay off mortgage with sale of taxable account assets?

Post by JoeRetire » Thu Aug 29, 2019 6:49 am

WhiteLightning wrote:
Wed Aug 28, 2019 9:03 pm
My wife and I are both just ready to be done with the mortgage. I guess we are just getting too impatient to wait the 6-7 years.
Why did you get a mortgage in the first place?

Is your debt aversion something that just recently appeared? Did something specific happen to you?

Admiral
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Re: Pay off mortgage with sale of taxable account assets?

Post by Admiral » Thu Aug 29, 2019 7:00 am

I would not pay the CG tax to save the interest (which is low to begin with). If it's bothering you for some reason, use cash flow and get it paid off in a few years.

Bacchus01
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Re: Pay off mortgage with sale of taxable account assets?

Post by Bacchus01 » Thu Aug 29, 2019 7:07 am

I would never do that, but it’s a personal choice. I prefer flexibility the high probability that TSM will return higher than 3.65% over the next 22 years.

stan1
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Re: Pay off mortgage with sale of taxable account assets?

Post by stan1 » Thu Aug 29, 2019 7:14 am

I view my taxable investing account as liquidity. Liquidity gives you financial freedom because it gives you the ability to make choices. A paid off home does not give you choices. There's no way I would drop my liquid investing assets from $400K to $150K in order to prepay my living expenses for the next 7-10 years. If you had $1M in the taxable account and wanted to pull out $250K I'd be saying "do what you want, it doesn't matter"; but that's not your situation.

Other people would make a different choice. It is in the end a personal preference with no right or wrong answer.

If you decide to keep the loan you might look into a refi or other options to save interest.

Rus In Urbe
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Re: Pay off mortgage with sale of taxable account assets?

Post by Rus In Urbe » Thu Aug 29, 2019 7:17 am

I am a HUGE FAN of paying off the mortgage.
That said, looking at your entire situation, (by my way of thinking anyway),
you are right on the line in terms of hold ya or raise ya.

I'm as guilty as the next person of sometimes falling into the "all or nothing" thinking.
My advice is: Take it in stages.

This year, liquidate $100K of taxable, pay down that part of mortgage.
See how that feels.
In one year, reassess your position and either pay off the rest.
Or pay off a chunk more.
Or hold.

This way, you get the gratification of seeing a chunk of it disappear.
Your mortgage timeline is cut in half...the end is in sight.
But you retain some flexibility should your situation change dramatically.

Congratulations on creating a very solid financial base for you and your family!
Cheers! :beer Rus
I'd like to live as a poor man with lots of money. ~Pablo Picasso

chw
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Re: Pay off mortgage with sale of taxable account assets?

Post by chw » Thu Aug 29, 2019 7:23 am

I would not pay the capital gains to pay off the mortgage. I would use all dividends, and annual capital gain distributions from the taxable account to pay towards the principal.

As you have other surplus cash, use it towards the principal as well.

Only make the extra principal payments after maxing out your 401k and IRA contributions. You have a great fixed rate on the mortgage, so would focus on making sure retirement accounts get funded, and possibly 529 account for your child. College years creep up fast, and if you get a head start on saving for them, the options for your child could be greater.

noco-hawkeye
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Re: Pay off mortgage with sale of taxable account assets?

Post by noco-hawkeye » Thu Aug 29, 2019 7:26 am

What is your expected expenses in retirement (or even now)?

In a situation like this, I would use your current assets and see to what degree they can cover retirement expenses. Say you have 1M total, and plan on a 4% SWW, so you get 40k / year in retirement income. If your current expenses are something greater than 100k / year, then you are still in need of saving a good deal of money. (and I'm not sure I would do what you are suggesting).

You've done a great job in saving what you have so far, but its not clear what your future needs are.

We did something like what you are suggesting and really appreciate the new cash flow / reduction in one more thing hanging over our heads. Before we did this, we wanted our kids 529 and retirement funding to be at something greater than 80% completed. (I'm not sure 80% was the actual number, but something close to that)

stan1
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Re: Pay off mortgage with sale of taxable account assets?

Post by stan1 » Thu Aug 29, 2019 7:28 am

noco-hawkeye wrote:
Thu Aug 29, 2019 7:26 am
What is your expected expenses in retirement (or even now)?
They are in their mid-30s with a 1 year old child. I wouldn't worry about retirement expenses at this point beyond maxing out retirement accounts.

HomeStretch
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Re: Pay off mortgage with sale of taxable account assets?

Post by HomeStretch » Thu Aug 29, 2019 7:40 am

Whether to pay off mortgage early is a personal choice. I am a proponent of paying off mortgage. We did it in our 30s (via cash flow) and never regretted it.

In your case however, I would not incur the capital gains in one year to pay it off early. Agree with the suggestion to refinance if possible to a lower-rate 7 or 10-year mortgage. Pay extra against your mortgage with the $22k per year cash flow plus the taxable account dividends/capital gains (rather than reinvesting) which are probably at least $8k per year. Your mortgage could be paid off in 5 years by age 40.

DVMResident
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Re: Pay off mortgage with sale of taxable account assets?

Post by DVMResident » Thu Aug 29, 2019 7:51 am

You know the math is not in favor of paying LTCG over the interest. This is just a physiological boost.

If you really want to do this, here’s a couple of options to help accelerate the process:

-Turn off dividend reinvestment and throw them at the mortgage. This will add maybe $6k-$8k/year (depending on the yield of your portfolio).

-Find shares with little-to-no cost gains. Sell those to minimize the tax burden. If you the patiences, you can wait and sell them”losers” as they fall organically (bundling this with tax loss harvest).

You’ll be fine either way.

GoldenFinch
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Re: Pay off mortgage with sale of taxable account assets?

Post by GoldenFinch » Thu Aug 29, 2019 8:00 am

If the mortgage debt bothers you, consider paying it down with cash flow. Don’t touch your taxable accounts, but instead max out your retirement funds and throw any extra savings toward mortgage principal.

student
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Re: Pay off mortgage with sale of taxable account assets?

Post by student » Thu Aug 29, 2019 8:03 am

DVMResident wrote:
Thu Aug 29, 2019 7:51 am
You know the math is not in favor of paying LTCG over the interest. This is just a physiological boost.

If you really want to do this, here’s a couple of options to help accelerate the process:

-Turn off dividend reinvestment and throw them at the mortgage. This will add maybe $6k-$8k/year (depending on the yield of your portfolio).

-Find shares with little-to-no cost gains. Sell those to minimize the tax burden. If you the patiences, you can wait and sell them”losers” as they fall organically (bundling this with tax loss harvest).

You’ll be fine either way.
+1.

cherijoh
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Re: Pay off mortgage with sale of taxable account assets?

Post by cherijoh » Thu Aug 29, 2019 8:30 am

WhiteLightning wrote:
Wed Aug 28, 2019 8:31 pm
The mortgage is the only debt we have left and we REALLY like the idea of being completely debt free.

Details:
My wife and I are both in our mid-30s.
We have a 1 year old child.

$250k remaining mortgage balance (26 years left on 30 year fixed, 3.625% interest rate)
$400k approximate home value
We have no plans on moving in the near future :annoyed

$400k total in taxable brokerage (mostly index funds with a few individual stocks)
-$250k of the 400k would be sold to fund the mortgage pay off
-$50k-60k of long-term capital gains in the $250k

$600k other investments (401Ks, Roth IRAs, HSAs)
-invested at 85/15 stock/bond split

$30k liquid emergency fund

$200k per year household income

Questions:
1. What would be the tax impact of selling the $250k taxable assets and using that to pay off the mortage? Would it just be %15 of the LTCG?
2. Are there any other implications of doing this that I am not seeing? I am aware of the opportunity cost of the $250k being invested in the market.
3. Our overall investment split is 85/15 stock/bond. Once the mortgage is paid off, should I consider shifting my investments more into equities to maintain our equity exposure?

Thanks!
1) So where are you going to get the money to pay the taxes? Do you know about NIIT? It sounds like you would be up around the income it kicks if you are right about the amount of capital gains. Before making your decision I would run a mock tax return to see if it impacts anything else like the phaseout for child tax credit and Roth IRAs. Although in the case of the latter, you could do a Backdoor Roth.

3) My biggest concern about paying off your mortgage is how it impacts the distribution of your assets. (See analysis below). Do you really want over 1/3 of your net worth tied up in your house? You have a very reasonable interest rate which makes for a good inflation hedge.

Does your mortgage permit a recast where you make a lump sum principal payment and then it recalculates your mortgage payment? (Usually, there is a small fee associated with doing one). If recasts are allowed, as a compromise, I would suggest selling any individual stocks plus some index funds to get to ~$100k. Apply that to the mortgage principal, recast the mortgage, but then continue to make your current mortgage payment to speed up the pay off of your house. When you build up additional investments in the future, you could rinse and repeat.

3) No. I would not go any higher than 85/15 for AA.


Your current net worth picture is:
  • $30k - emergency fund (2.5%) <-- a $30K emergency fund on $200K income is pretty skimpy IMO.
  • $400k - taxable investments (33.9%)
  • $600k - tax-advantaged accts (50.9%)
  • $150k - home equity (12.7%)
After mortgage payoff (assuming you pay taxes out of cash flow and don't sell additional investments):
  • $30k - emergency fund (2.5%)
  • $150k - taxable investment (12.7%)
  • $600k - tax-advantaged accts (50.9%)
  • $400k - home equity (33.9%)
Compromise I suggested above:
  • $30k - emergency fund (2.5%)
  • $300k - taxable investment (25.4%)
  • $600k - tax-advantaged accts (50.9%)
  • $250k - home equity (21.2%)

msk
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Re: Pay off mortgage with sale of taxable account assets?

Post by msk » Thu Aug 29, 2019 8:41 am

WhiteLightning wrote:
Wed Aug 28, 2019 8:31 pm
$200k per year household income
"Save and invest 30% of after tax income. Paying off principal on a home mortgage counts as investing"
Pay off $50k per annum... Capital appreciation on the home (hopefully) is tax advantaged. No need for complicated arithmetic.

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Re: Pay off mortgage with sale of taxable account assets?

Post by abuss368 » Thu Aug 29, 2019 8:58 am

msk wrote:
Thu Aug 29, 2019 8:41 am
WhiteLightning wrote:
Wed Aug 28, 2019 8:31 pm
$200k per year household income
"Save and invest 30% of after tax income. Paying off principal on a home mortgage counts as investing"
Pay off $50k per annum... Capital appreciation on the home (hopefully) is tax advantaged. No need for complicated arithmetic.
That was my mindset as well - making additional principal payments.
John C. Bogle: "Simplicity is the master key to financial success."

UpperNwGuy
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Re: Pay off mortgage with sale of taxable account assets?

Post by UpperNwGuy » Thu Aug 29, 2019 9:10 am

Don’t sell your taxable portfolio just to pay a mortgage. It may make you feel good, but your financial position will be worse.

hightower
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Re: Pay off mortgage with sale of taxable account assets?

Post by hightower » Thu Aug 29, 2019 9:12 am

No, I would not suggest paying off a mortgage at this stage in life. Your money is much more valuable to you invested for the next 30 years, then it is tied up in equity in a home. IF you were 59 and about to retire, it would be a whole different story.
Why are you so focused on being completely debt free? Mortgage debt is not bad to carry. It's tax deductible for one thing and it's very easy to get out of if needed. Right now you have a good amount of equity already tied to that house. Think of that as an investment in a single stock (1 share of 1 house). That investment is not diversified at all and could lose value very easily just as happened in 2009. Why put more of your own money at risk if you don't have to? Let the bank shoulder some of that risk. Keep your cash invested and let it work for you.

Keep saving, keep investing. In no time at all, that house will be paid off and your investment accounts will be much larger.

tedgeorge
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Re: Pay off mortgage with sale of taxable account assets?

Post by tedgeorge » Thu Aug 29, 2019 9:19 am

I'm of the mind to keep that liquidity to keep your options open. We had our forever house and then kid #2 showed up. Now we have a new forever house... Very stressful doing a heloc to unlock the cash needed to help manage the move/construction/purchase then float two mortgages.

Just keep doing what you are doing and that mortgage will be gone soon. Make a chart or something to make yourself feel good as you watch it go down. Go celebrate with a dinner at the major milestones. And make a net worth statement so you can celebrate those milestones too! You have $1M in your 30s! Outstanding!

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Re: Pay off mortgage with sale of taxable account assets?

Post by Admiral » Thu Aug 29, 2019 10:32 am

One of the (mental) things that I do to make me feel better about my mortgage is to periodically remind myself that every month, my bond coupons pay me as much or more than the interest on my loan is costing me. Add in some 1-2% dividends on TSM and all I'm really doing is paying the principal over 12 years instead of all at once.

:sharebeer

FrugalConservative
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Re: Pay off mortgage with sale of taxable account assets?

Post by FrugalConservative » Thu Aug 29, 2019 11:08 am

I dont see the upside on paying off your mortgage other then piece of mind.

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Re: Pay off mortgage with sale of taxable account assets?

Post by grabiner » Thu Aug 29, 2019 9:14 pm

This is discussed on the wiki: Paying down loans versus investing

Unless you donate a lot to charity, your mortgage interest is not tax-deductible, so you get a 3.625% risk-free return on the mortgage payoff. The $9K in capital-gains tax is 3.6% of the mortgage balance, and since your mortgage has an 11-year duration, that reduces the return on a mortgage payoff by 3.6%/11=0.33% to 3.3%.

A fair comparison would normally be selling long-term bonds, which earn much less than 3.3%. Admiral shares of Vanguard Long-Term Tax-Exempt yield 1.88%, with some credit risk but a shorter duration than the mortgage payoff. So you could get a low-risk return of 1.4% by selling these bonds to pay off your mortgage, and that is a good deal.

One issue is a loss of liquidity, but you will still have $140K in your taxable account even after paying off the mortgage and paying the tax bill, so this isn't as important. In particular, if you do need to buy a new house for some reason, the $140K will be enough for a down payment, so you won't need to making buying a new house contingent on selling the old one.

The complicating factor is that you don't have this much in bonds. You currently have $910K in stock and $90K in bonds. If you sell stock to pay off the mortgage, you can sell $90K in bonds in your 401(k) and IRA to buy more stock if you wish, but then you will be all stock. So, if you are 100% stock, would you be willing to borrow at 3.3% to buy even more stock? If so, you shouldn't pay off the mortgage. My guess is that your answer is no; you will be slightly reducing your expected returns by paying off the mortgage, but the risk reduction is worthwhile.

In addition, you are only taking a temporary reduction in your stock holdings. If you pay off the mortgage, you can use the money that was currently going to mortgage payments to buy more stock if that is consistent with your risk tolerance. (And that stock can also go in a 529 plan for your child.)
Wiki David Grabiner

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JoeRetire
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Re: Pay off mortgage with sale of taxable account assets?

Post by JoeRetire » Thu Aug 29, 2019 9:34 pm

FrugalConservative wrote:
Thu Aug 29, 2019 11:08 am
I dont see the upside on paying off your mortgage other then piece of mind.
Saving the cost of the mortgage interest is a potential upside.

(Not saying I agree that most people should pay off their mortgage, though.)

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Watty
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Re: Pay off mortgage with sale of taxable account assets?

Post by Watty » Thu Aug 29, 2019 10:53 pm

WhiteLightning wrote:
Wed Aug 28, 2019 8:31 pm
1. What would be the tax impact of selling the $250k taxable assets and using that to pay off the mortage? Would it just be %15 of the LTCG?
It would be good to do some dummy tax returns to figure out just what the tax impact would be since some tax credits or other tax limitations may be phased out as your income increases. If you have someone else do your taxes then it would be worthwhile to pay them to do a few "what if" cases. One thing to look at is that there is a Medicare surtax on high income people but I don't recall the details of how that works.

You should also look at maybe selling something like $125K if the assets now and then selling the other $125K in January when it would be on your 2020 taxes.
WhiteLightning wrote:
Wed Aug 28, 2019 8:31 pm
$400k total in taxable brokerage (mostly index funds with a few individual stocks)
.....
$600k other investments (401Ks, Roth IRAs, HSAs)
-invested at 85/15 stock/bond split
It sounds like the taxable account is 100% stocks.

15% of $600K is $90K in bonds.

With a million dollars only having $90k in bonds is 91% stocks and 9% bonds. :shock:

That may be more aggressive than you would want.

It is not exact by there is a argument that having a mortage is like having a negative bond. If you calculate it this way then your bond holdings are $90K-$250K = negative $160K in bonds. That would put your stock holdings at well over 100%. Again that is not exact but there is more than a grain of truth in looking at a mortage as a negative bond.

Whatever you do with the mortage you might want to reconsider your asset allocation. The market is still near an alltime high and there has been a historic 10+ year bull market so it is easy to lose perspective and be too aggressive. One question when deciding how much risk to take is if you have a need to take a lot of risk. From what you have said I don't see any need to take any extra risk.


A few sort of random thoughts.

1) Other than dying or giving the taxable investments away I don't see any way that you are not going to pay the capital gains taxes sooner or later. It may not be a question "if" you should pay the capital gains taxes just "when".

2) Capital gains tax rates could be higher in the future. We cannot talk politics here but it is not impossible that they could be taxed at your ordinary income tax rate someday.

3) In some states home equity has some protection if you are sued.

4) In ten years from now when you look back one option will turn out to have been better than the other. That does not mean that the other was really a bad choice, just that you missed an opportunity.

5) If the worst financial mistake you ever make is having a paid of house by the time you are in your mid thirties that is doing pretty dang good. :beer

The last time I looked it up about a third of all homes are owned without a mortage so you would have plenty of company if you pay it off.

desiderium
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Re: Pay off mortgage with sale of taxable account assets?

Post by desiderium » Thu Aug 29, 2019 11:31 pm

stan1 wrote:
Thu Aug 29, 2019 7:14 am
I view my taxable investing account as liquidity. Liquidity gives you financial freedom because it gives you the ability to make choices. A paid off home does not give you choices. There's no way I would drop my liquid investing assets from $400K to $150K in order to prepay my living expenses for the next 7-10 years. If you had $1M in the taxable account and wanted to pull out $250K I'd be saying "do what you want, it doesn't matter"; but that's not your situation.

Other people would make a different choice. It is in the end a personal preference with no right or wrong answer.

If you decide to keep the loan you might look into a refi or other options to save interest.
This is a very important point that gets missed in all the attempts to calculate the financial optimum. Bad things happen sometimes. Worse things than living without a paycheck for 6 months. Having a comfortable cushion in taxable savings is safety; home equity may be useless in some situations.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Dude2 » Fri Aug 30, 2019 12:59 am

In terms of practice what you preach, I very recently did this exact thing, and I exhaustively read Boglehead posts prior to try to gain in wisdom. In the end, it is a personal decision.

I can understand that the volatility in the stock market triggers this response. It is a matter of trust. If you are like me, you just fundamentally, deep-down don't trust stocks. How can you trust something whose value keeps changing? Just when you think you've made progress, boom much of the progress is wiped off the map. There are geo-political forces in play. It's like a game in which the winners win.

On the other hand, you make 3.xxx percent right now, and you can stop paying somebody else to use their money. Everyone who argues against it has a fundamental trust of stocks. To me, that trust is itself the pyramid scheme that keeps stock values up.

Take your guaranteed return now. Pay your taxes. Be happy to be debt free earlier.

At least that's a voice from the other side. I didn't want it to weigh too heavily in favor of not doing it, but I do see the wisdom in a middle-ground approach, especially because you're young. Diverting dividends and aggressively paying down versus liquidation is a wise middle ground.

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Harry Livermore
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Re: Pay off mortgage with sale of taxable account assets?

Post by Harry Livermore » Fri Aug 30, 2019 5:47 am

Incurring CG tax to pay off a mortgage, while having no other debt, would not really be my approach. I would cashflow additional principal payments, as others have suggested, even to the point of pain each month. You can pay down the mortgage very quickly, while still building wealth in your taxable accounts. If times get tough (yes, it can happen to anyone!) you will have the ability to stop the additional payments, and STILL have the money in the bank so to speak. You indicated that you are aware of the opportunity cost but might not fully appreciate the difference in comfort between having $430K liquid and easily accessible, and having no mortgage.
But if you are dead set on being debt free immediately (as opposed to 5-10 years from now) obviously I'd advise looking carefully at specific stocks, ETFs, and lots to really minimize the tax impact.
I think your AA should remain unchanged, especially since we seem to be at the tail end of a long bull market, with interest rates near zero (horrors! I might be speaking of "market timing") 85/15 seems basically "all equity" to me. Of course, I'm 53, not in my mid-30s anymore. But 85/15 is about as high as I ever dared go.
Cheers

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Re: Pay off mortgage with sale of taxable account assets?

Post by hightower » Fri Aug 30, 2019 7:02 am

Dude2 wrote:
Fri Aug 30, 2019 12:59 am
It is a matter of trust. If you are like me, you just fundamentally, deep-down don't trust stocks. How can you trust something whose value keeps changing? Just when you think you've made progress, boom much of the progress is wiped off the map. There are geo-political forces in play. It's like a game in which the winners win.

On the other hand, you make 3.xxx percent right now, and you can stop paying somebody else to use their money. Everyone who argues against it has a fundamental trust of stocks. To me, that trust is itself the pyramid scheme that keeps stock values up.
You don't have to invest in just stocks ya know;) There are lot's of other ways to put your money to work for you.
Anyway, I'm going to go out on a limb here and assume you didn't own any real estate during the 2008/2009 market crash? Or if you did, you were lucky enough to have a steady job and no need to move/sell your home? Because if you distrust stocks due to the fact that their value changes, then you should REALLY distrust real estate. I hate to burst the bubble for you, but your home value changes all the time too. You just don't realize it because no one is advertising it's value on TV all day and you really don't know what it's truly worth until you try to sell it. And it can crash just as hard as the stock market. The reason I invest in stocks is not because I have a "fundamental trust" of them, but because it's the most diverse investment I can make. Putting all of your investable money into just one home at an early age is similar to putting all of your money into just one stock (not a mutual fund, but an actual individual company). It's very risky. You're betting that your money is going to be safe in the form of home equity. Unfortunately, that's not always the case. Not only that, but in order to maintain your home's value, you have to put money into it to maintain it and repair it and if you stay in it long enough, renovate it so that it remains up to modern standards. In the end, when you factor in all the money you've spent on a home, the returns are often not very good at all. With stocks, you don't have to do anything but buy them and wait.
Also, when you pay off a mortgage, you're not getting a guaranteed return like an investment. The mortgage rate is a fixed finance charge. It's a fixed dollar amount that does not compound. You can pay it all at once early and get a discount or you can pay it in full over the life of the loan. It's not the same as getting 4% return in the stock market (which historically is very easy to beat), because in the stock market you get the power of compounding working for you. The earlier you start, the better that compounding power is. That's why it's foolish to pour money into a mortgage at such a young age with money that would otherwise be invested.
I get that being debt free is a great thing, but not if it means you're missing out on building real wealth.

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Re: Pay off mortgage with sale of taxable account assets?

Post by galawdawg » Fri Aug 30, 2019 7:37 am

While my mortgage rate is lower (2.675%) than yours, when I retired last year I chose not to payoff my mortgage. I too would have incurred CG taxes plus 6% state tax if I had paid it off immediately or zero CG taxes (but 6% state taxes) if I spread the withdrawals from my taxable investments over a few years to keep my federal CG tax rate at 0%.

For me, my pension income in retirement covers all of my basic monthly expenses including the mortgage. i preferred the liquidity of keeping those funds invested and the modest interest savings I would have realized were likely (but not guaranteed) to be less than the gains on those invested funds.

I agree with other posters that if you want the mortgage paid off sooner rather than later, by all means continue to make extra principal payments with surplus cash flow. That gives you both the option of an earlier payoff as well as flexibility to use those funds in other ways should your circumstances change in the future.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Admiral » Fri Aug 30, 2019 7:50 am

hightower wrote:
Fri Aug 30, 2019 7:02 am

Also, when you pay off a mortgage, you're not getting a guaranteed return like an investment. The mortgage rate is a fixed finance charge. It's a fixed dollar amount that does not compound.
This is incorrect. The return you get on your "investment" is equal to your mortgage rate. The "return" you actually receive is the interest reduction, which is why people sometimes refer to a mortgage as a "negative bond."

That still does not favor paying it off in this case, but let's make sure we're giving accurate information.
:sharebeer

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JoeRetire
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Re: Pay off mortgage with sale of taxable account assets?

Post by JoeRetire » Fri Aug 30, 2019 7:53 am

Dude2 wrote:
Fri Aug 30, 2019 12:59 am
I can understand that the volatility in the stock market triggers this response. It is a matter of trust. If you are like me, you just fundamentally, deep-down don't trust stocks. How can you trust something whose value keeps changing? Just when you think you've made progress, boom much of the progress is wiped off the map. There are geo-political forces in play. It's like a game in which the winners win.
Uhm, okay.
On the other hand, you make 3.xxx percent right now
Of course you don't make 3.xxx percent right now. You give up a bunch of your money, and make back the 3.xxx percent over time.
and you can stop paying somebody else to use their money. Everyone who argues against it has a fundamental trust of stocks. To me, that trust is itself the pyramid scheme that keeps stock values up.
I assume you either don't own a home, since the value of your home keep changing. Or perhaps you paid cash for it, so that you never need to use their money.

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Re: Pay off mortgage with sale of taxable account assets?

Post by HEDGEFUNDIE » Fri Aug 30, 2019 7:56 am

Dude2 wrote:
Fri Aug 30, 2019 12:59 am
If you are like me, you just fundamentally, deep-down don't trust stocks. How can you trust something whose value keeps changing? Just when you think you've made progress, boom much of the progress is wiped off the map. There are geo-political forces in play. It's like a game in which the winners win.

On the other hand, you make 3.xxx percent right now, and you can stop paying somebody else to use their money. Everyone who argues against it has a fundamental trust of stocks. To me, that trust is itself the pyramid scheme that keeps stock values up.
Everything that is of value can change in value. Stocks, bonds, housing, even the dollar itself. That’s not because they are scams, it’s because time moves on, new events occur, the world changes, and people are willing to pay more or less for those assets due to those changes. Even “guaranteed” investments can lose (or gain value) due to inflation (or deflation).

If your house had a ticket symbol with a market price that updated every second, like a stock, it would be just as volatile. Don’t take my word for it, you can already see this in any REIT.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Watty » Fri Aug 30, 2019 8:55 am

Admiral wrote:
Fri Aug 30, 2019 7:50 am
hightower wrote:
Fri Aug 30, 2019 7:02 am

Also, when you pay off a mortgage, you're not getting a guaranteed return like an investment. The mortgage rate is a fixed finance charge. It's a fixed dollar amount that does not compound.
This is incorrect. The return you get on your "investment" is equal to your mortgage rate. The "return" you actually receive is the interest reduction, which is why people sometimes refer to a mortgage as a "negative bond."

That still does not favor paying it off in this case, but let's make sure we're giving accurate information.
:sharebeer
That is called "imputed rent" which you can google. A big advantage of that is that you do not need to pay taxes on that virtual income. This is especially important when you are retired and might be able to avoid making taxable IRA withdrawals to pay rent or a mortage.
galawdawg wrote:
Fri Aug 30, 2019 7:37 am
I agree with other posters that if you want the mortgage paid off sooner rather than later, by all means continue to make extra principal payments with surplus cash flow.
One thing that may not have been mentioned is that the investments in the taxable accounts can be set to not automatically reinvest dividends and capital gains distributions. Those can also be used to pay down the mortgage and with $400K a 2% dividend would give you an extra $8k a year to put towards the mortage.
galawdawg wrote:
Fri Aug 30, 2019 7:37 am
While my mortgage rate is lower (2.675%) than yours, when I retired last year I chose not to payoff my mortgage. I too would have incurred CG taxes plus 6% state tax if I had paid it off immediately or zero CG taxes (but 6% state taxes) if I spread the withdrawals from my taxable investments over a few years to keep my federal CG tax rate at 0%.
Even with a low interest rate you would still have significant sequence of returns risk so you may want to invest that money conservatively since it is earmarked for paying off the mortage over the next few years. Here is a very simplistic example of that which I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

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Re: Pay off mortgage with sale of taxable account assets?

Post by galawdawg » Fri Aug 30, 2019 10:45 am

Watty wrote:
Fri Aug 30, 2019 8:55 am
galawdawg wrote:
Fri Aug 30, 2019 7:37 am
While my mortgage rate is lower (2.675%) than yours, when I retired last year I chose not to payoff my mortgage. I too would have incurred CG taxes plus 6% state tax if I had paid it off immediately or zero CG taxes (but 6% state taxes) if I spread the withdrawals from my taxable investments over a few years to keep my federal CG tax rate at 0%.
Even with a low interest rate you would still have significant sequence of returns risk so you may want to invest that money conservatively since it is earmarked for paying off the mortage over the next few years. Here is a very simplistic example of that which I have posted before.
Maybe my post wasn't clear, I plan to just continue to make my monthly mortgage payment as usual and have it paid off when I make the last scheduled payment. I have no need to use the funds in my portfolio for my mortgage or any other regular expenses.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Watty » Fri Aug 30, 2019 1:14 pm

galawdawg wrote:
Fri Aug 30, 2019 10:45 am
Watty wrote:
Fri Aug 30, 2019 8:55 am
galawdawg wrote:
Fri Aug 30, 2019 7:37 am
While my mortgage rate is lower (2.675%) than yours, when I retired last year I chose not to payoff my mortgage. I too would have incurred CG taxes plus 6% state tax if I had paid it off immediately or zero CG taxes (but 6% state taxes) if I spread the withdrawals from my taxable investments over a few years to keep my federal CG tax rate at 0%.
Even with a low interest rate you would still have significant sequence of returns risk so you may want to invest that money conservatively since it is earmarked for paying off the mortage over the next few years. Here is a very simplistic example of that which I have posted before.
Maybe my post wasn't clear, I plan to just continue to make my monthly mortgage payment as usual and have it paid off when I make the last scheduled payment. I have no need to use the funds in my portfolio for my mortgage or any other regular expenses.

That makes sense. I was thinking that you might be spreading the sale of stocks over several years to reduce the taxes, which could also make sense in some situations.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Bastiat » Fri Aug 30, 2019 2:01 pm

I'm not a fan of making emotional decisions with sub-optimal outcomes. Obviously anything can happen, but in general TSM should beat 3.65% (minus your marginal tax rate benefit) over 26 years.

Not only that but it's costing you Liquidity/options and LTCG.

Just cashflow it after you've maxed retirement accounts.

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Re: Pay off mortgage with sale of taxable account assets?

Post by willthrill81 » Fri Aug 30, 2019 2:18 pm

Bastiat wrote:
Fri Aug 30, 2019 2:01 pm
I'm not a fan of making emotional decisions with sub-optimal outcomes.
It depends entirely on what you're trying to optimize.

Some are trying to maximize their net wealth. Others are trying to minimize negative emotions. Etc. As such, what is 'optimal' for one may not be for another.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Pay off mortgage with sale of taxable account assets?

Post by abuss368 » Fri Aug 30, 2019 2:20 pm

You are also giving up future investment compounding.
John C. Bogle: "Simplicity is the master key to financial success."

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Re: Pay off mortgage with sale of taxable account assets?

Post by grabiner » Fri Aug 30, 2019 3:03 pm

hightower wrote:
Fri Aug 30, 2019 7:02 am
Because if you distrust stocks due to the fact that their value changes, then you should REALLY distrust real estate. I hate to burst the bubble for you, but your home value changes all the time too. You just don't realize it because no one is advertising it's value on TV all day and you really don't know what it's truly worth until you try to sell it. And it can crash just as hard as the stock market. The reason I invest in stocks is not because I have a "fundamental trust" of them, but because it's the most diverse investment I can make. Putting all of your investable money into just one home at an early age is similar to putting all of your money into just one stock (not a mutual fund, but an actual individual company). It's very risky.
However, the risk doesn't depend on whether you have a mortgage. If your $400K home loses 20% of its value, your net worth declines by $80K, whether you have a $240K mortgage (so that you lost half your equity) or no mortgage (so that you lost 20% of your equity). It does depend on how much of your net worth is in the home, but that is not changed if you sell investments to pay off a mortgage.

A home is also less risky in this sense, because you can continue to live in it. If you own a home and home prices decline, your home still provides you just as much housing. If you own stocks and stock prices decline, your stocks can buy less and your standard of living will decline.

This is why it makes sense for many people to buy an expensive home with a mortgage, while it makes much less sense for most investors to buy a lot of stock on margin (or a leveraged stock fund, to avoid margin calls).
Wiki David Grabiner

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Re: Pay off mortgage with sale of taxable account assets?

Post by Bastiat » Fri Aug 30, 2019 11:28 pm

willthrill81 wrote:
Fri Aug 30, 2019 2:18 pm
Bastiat wrote:
Fri Aug 30, 2019 2:01 pm
I'm not a fan of making emotional decisions with sub-optimal outcomes.
It depends entirely on what you're trying to optimize.

Some are trying to maximize their net wealth. Others are trying to minimize negative emotions. Etc. As such, what is 'optimal' for one may not be for another.
Does anyone (besides Biggie) disagree that more money is more optimal than less money?

I want to minimize negative emotions so i stuff my money in a mattress. My allocation is "optimal". Yay.

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Re: Pay off mortgage with sale of taxable account assets?

Post by willthrill81 » Fri Aug 30, 2019 11:40 pm

Bastiat wrote:
Fri Aug 30, 2019 11:28 pm
willthrill81 wrote:
Fri Aug 30, 2019 2:18 pm
Bastiat wrote:
Fri Aug 30, 2019 2:01 pm
I'm not a fan of making emotional decisions with sub-optimal outcomes.
It depends entirely on what you're trying to optimize.

Some are trying to maximize their net wealth. Others are trying to minimize negative emotions. Etc. As such, what is 'optimal' for one may not be for another.
Does anyone (besides Biggie) disagree that more money is more optimal than less money?
Where do you draw the line? Do you spend as little as you possibly can in order to accumulate more money? It's far more likely that you spend more than you really need to in order to make yourself more comfortable. Many investors take the same approach; they are willing to forego money in order to have a more comfortable ride.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Pay off mortgage with sale of taxable account assets?

Post by Dude2 » Sat Aug 31, 2019 12:07 am

HEDGEFUNDIE wrote:
Fri Aug 30, 2019 7:56 am
If your house had a ticket symbol with a market price that updated every second, like a stock, it would be just as volatile. Don’t take my word for it, you can already see this in any REIT.
I respectfully disagree that the value of one's home is similar to the value of owning REIT stock. A person can look at their home's value on Zillow and generally see a pretty stable line. I am not suggesting we do an exhaustive analysis and plot the correlation of the two with the global economy. It just seems reasonable that my home provides a pretty stable value. As an investment it could be considered a bond or cash that barely keeps up with inflation. Because of this, many people believe they can do better borrowing against its value and investing in stocks. Those risk and reward animals are different. In other words, a paid off house is like sitting on a cash investment. Small risk, small reward potential. This may be very suitable for some people. Stocks are high risk, high reward potential. This may also be very suitable for some people. When risk shows up, it affects value. The riskier an asset, the more uncertainty of its value. A paid off house has a value. A similar investment in the stock market has a value that is much less well-known. You play the game. You roll the dice. You get what you get. My home has utility which gives it value apart from intangible stock. I also have a homestead exemption which gives it more value as a stable investment -- creditors or the government can't take it away.
Last edited by Dude2 on Sat Aug 31, 2019 12:21 am, edited 1 time in total.

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Re: Pay off mortgage with sale of taxable account assets?

Post by Watty » Sat Aug 31, 2019 12:12 am

Bastiat wrote:
Fri Aug 30, 2019 11:28 pm
willthrill81 wrote:
Fri Aug 30, 2019 2:18 pm
Bastiat wrote:
Fri Aug 30, 2019 2:01 pm
I'm not a fan of making emotional decisions with sub-optimal outcomes.
It depends entirely on what you're trying to optimize.

Some are trying to maximize their net wealth. Others are trying to minimize negative emotions. Etc. As such, what is 'optimal' for one may not be for another.
Does anyone (besides Biggie) disagree that more money is more optimal than less money?

I want to minimize negative emotions so i stuff my money in a mattress. My allocation is "optimal". Yay.
One of the things that makes the "Should I pay off my mortage?" question so difficult to answer is that there is not one optimal right answer of what it best. This is because you could pick out the one best answer based on the highest average expected outcome there will also be lots of scenarios where the other choice would have been better.

Depending on their situation avoiding a 10% chance that thing might turn out badly by paying off the loan might be worth giving up the higher expected return of keeping the mortage.

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Re: Pay off mortgage with sale of taxable account assets?

Post by gblack » Sat Aug 31, 2019 1:08 am

New here, but surprised how many people are against paying off mortgage. I'd do it in your situation, particularly if that's what your gut says.

With no housing payment making 200K, you'll replenish the taxable account in no time.

What type of money emergency are people imagining where 150K cushion after 30K emergency fund isn't enough? Again...with no housing payment.

Worst comes to worst, you can take out a 2nd mortgage, sell the house, or take a 401k loan, but it'll never come to that.

Pay it off. You're debt free with like 780K liquid and nearly 1.2 net worth in your 30s. You're winning.

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