Sell equities to pay down mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Sell equities to pay down mortgage

Post by Triple digit golfer » Thu Nov 07, 2019 1:07 pm

General information:

$150k gross salary; wife stays at home with 2 year-old
$775k total investment portfolio; $225k of that is in taxable and available in an emergency

My wife and I purchased our house in 2016 and put down only 10%. The logic was that we had a house to sell and did not know how long it would take, so we did not want to plop down another $38,000 to get up to 20% down in case we ended up having two mortgages for a while. For this luxury, the price was an additional 0.125% interest rate. We're currently at 3.50% on a 30 year with 27 years remaining. The house ended up selling in a day. Lesson learned. Stop being so conservative.

I took the "extra" money that we did not put down and instead invested it in equities in a taxable account, assuming that I would simply leave it invested for the long-term as part of my portfolio. Since then, equities are up around 40%, give or take.

I am considering one of a few options:

A. Sell $50k of equities from my taxable account one time and put it toward the mortgage. I'd end up with around a $1,500 tax bill. This would shave 70 months off my mortgage.

B. Put an additional $300 per month to the mortgage. This would get the mortgage paid off in the same month 20 years from now as Option A above, but without a large outlay of cash. If I do this option, would I withdraw $300 per month (or maybe more simply, $1,200 per quarter) from equities as I go? This option is safer than Option A because I can always stop if an emergency arose and cash flow was tight.

C. Do nothing, keep paying current mortgage, keep the $50k invested. I can always pay the mortgage off in the future, say 10 years before it is due, if the market is at a high point and I am comfortable doing so.

How does home equity fit into asset allocation? Is it more like a stock or bond?

Just looking for some general guidance to help me make a decision, even if that decision is to do nothing.

John Doe 123
Posts: 103
Joined: Tue Dec 23, 2014 2:48 am

Re: Sell equities to pay down mortgage

Post by John Doe 123 » Thu Nov 07, 2019 1:16 pm

How much are you paying in PMI? It might make sense to sell some equities and pay the taxes on the gains to get rid of that PMI... but probably does not make sense beyond that IMO

User avatar
Watty
Posts: 17437
Joined: Wed Oct 10, 2007 3:55 pm

Re: Sell equities to pay down mortgage

Post by Watty » Thu Nov 07, 2019 1:32 pm

Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
A. Sell $50k of equities from my taxable account one time and put it toward the mortgage. I'd end up with around a $1,500 tax bill. This would shave 70 months off my mortgage.
If you do this you should contact your lender before you send the money and ask if they will "recast your Morgage" (Google this). They are not required to but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay your mortage down by 20%(or whatever) then your required monthly payment is reduced by the same percentage. The interest rate and length of the mortage stay the same. This could be important in case something happens like you are laid off, it interest rates go up a lot.

You did not say how much PMI you are paying but if you can get rid of PMI by doing this then this would likely be a good choice.
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
I am considering one of a few options:
I would add another option to look into.

Refinance into a new 15 year mortage. This would allow you to have the home paid off by the time your 2 years old starts college and that would allow you to use some of the cash flow from your "mortage payment" to pay for the college costs.

I did not try to crunch the numbers but if you can get rid of PMI, get a lower interest rate, and the refinance costs are not too high then it might make sense.

User avatar
Watty
Posts: 17437
Joined: Wed Oct 10, 2007 3:55 pm

Re: Sell equities to pay down mortgage

Post by Watty » Thu Nov 07, 2019 1:39 pm

Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
I'd end up with around a $1,500 tax bill.
One thing to remember about the capital gains taxes is that unless you can figure out a way to take the capital gains when you are in the 12% federal tax bracket where the long term capital gain tax rate is 0% then you may not be able to avoid paying the taxes sooner or later.

Paying taxes is never fun but there is a big difference between avoiding taxes and just delaying them.

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Thu Nov 07, 2019 1:55 pm

Watty wrote:
Thu Nov 07, 2019 1:32 pm
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
A. Sell $50k of equities from my taxable account one time and put it toward the mortgage. I'd end up with around a $1,500 tax bill. This would shave 70 months off my mortgage.
If you do this you should contact your lender before you send the money and ask if they will "recast your Morgage" (Google this). They are not required to but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay your mortage down by 20%(or whatever) then your required monthly payment is reduced by the same percentage. The interest rate and length of the mortage stay the same. This could be important in case something happens like you are laid off, it interest rates go up a lot.

You did not say how much PMI you are paying but if you can get rid of PMI by doing this then this would likely be a good choice.
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
I am considering one of a few options:
I would add another option to look into.

Refinance into a new 15 year mortage. This would allow you to have the home paid off by the time your 2 years old starts college and that would allow you to use some of the cash flow from your "mortage payment" to pay for the college costs.

I did not try to crunch the numbers but if you can get rid of PMI, get a lower interest rate, and the refinance costs are not too high then it might make sense.
The recasting is an excellent thought.

Currently, I'm not paying PMI. I settled on a 3.50% rate putting 10% down and the rate would have been 3.375% had I put 20% down. So essentially, I am paying it, I suppose, but through the interest rate. Once I hit 20%, it does not change; I'm locked in at 3.50% for the full term. Perhaps a bad deal at the time, but regardless, it is what it is.

I had thought of refinancing but the fees are likely in the thousands. I also don't necessarily like the fact that my mortgage would increase by $650 per month and total PITI would be 24% of my gross pay. We can afford it, but it's starting to get into "uneasy" territory. Mostly mental, I suppose, because $650 per month x 180 months is $117k, and I would have $50k to use toward that, therefore only increasing my additional outlay over the 15 years by $67k.

Also, the idea of selling equities to pay down the mortgage seems a bit like market timing to me. If the S&P 500 was at 2,000, I wouldn't even be considering selling equities.

My initial goal in all of this was to get to a point where I would be in the same position as if I had put 20% down. Paying a large lump sum and recasting seems like the route that would get me closest to that scenario.

Thank you for your thoughts. Very helpful.

DCChak
Posts: 98
Joined: Tue Nov 10, 2015 8:41 pm

Re: Sell equities to pay down mortgage

Post by DCChak » Thu Nov 07, 2019 2:13 pm

At the risk of further veering into market timing, I'm presuming, since you are here, that the equity investment is in a low cost, broad based index fund or ETF, and not an individual stock that has experienced better-than-the-market appreciation since your buy, amirite?

MarkerFM
Posts: 154
Joined: Fri Nov 30, 2018 4:18 pm

Re: Sell equities to pay down mortgage

Post by MarkerFM » Thu Nov 07, 2019 2:41 pm

I would (and actually am doing) choose option B. I try not to make moves that are one way (option A) or another (option C). Option B is a mix of both, and mitigates risks while leaving some flexibility. Once you pay mortgage principal down, it is expensive to re-borrow it. If you are doing it on your own, you can always stop if things change.

I have a 10/1 ARM that is interest-only for ten years and then starts amortizing (I don't actually remember the amortization term). It originally had a large balance, and when I sold some other real estate I put a chunk towards principal. Then, after a time I decided to add an equal amount to my monthly payment to pay down principal. I set this amount so that at the end of the 10 years, the mortgage would be gone. If the market were to crash or I needed the money for something else, I can always stop paying down the principal.

User avatar
CyclingDuo
Posts: 2638
Joined: Fri Jan 06, 2017 9:07 am

Re: Sell equities to pay down mortgage

Post by CyclingDuo » Thu Nov 07, 2019 3:09 pm

Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm
Watty wrote:
Thu Nov 07, 2019 1:32 pm
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
A. Sell $50k of equities from my taxable account one time and put it toward the mortgage. I'd end up with around a $1,500 tax bill. This would shave 70 months off my mortgage.
If you do this you should contact your lender before you send the money and ask if they will "recast your Morgage" (Google this). They are not required to but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay your mortage down by 20%(or whatever) then your required monthly payment is reduced by the same percentage. The interest rate and length of the mortage stay the same. This could be important in case something happens like you are laid off, it interest rates go up a lot.

You did not say how much PMI you are paying but if you can get rid of PMI by doing this then this would likely be a good choice.
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
I am considering one of a few options:
I would add another option to look into.

Refinance into a new 15 year mortage. This would allow you to have the home paid off by the time your 2 years old starts college and that would allow you to use some of the cash flow from your "mortage payment" to pay for the college costs.

I did not try to crunch the numbers but if you can get rid of PMI, get a lower interest rate, and the refinance costs are not too high then it might make sense.
The recasting is an excellent thought.

Currently, I'm not paying PMI. I settled on a 3.50% rate putting 10% down and the rate would have been 3.375% had I put 20% down. So essentially, I am paying it, I suppose, but through the interest rate. Once I hit 20%, it does not change; I'm locked in at 3.50% for the full term. Perhaps a bad deal at the time, but regardless, it is what it is.

I had thought of refinancing but the fees are likely in the thousands. I also don't necessarily like the fact that my mortgage would increase by $650 per month and total PITI would be 24% of my gross pay. We can afford it, but it's starting to get into "uneasy" territory. Mostly mental, I suppose, because $650 per month x 180 months is $117k, and I would have $50k to use toward that, therefore only increasing my additional outlay over the 15 years by $67k.

Also, the idea of selling equities to pay down the mortgage seems a bit like market timing to me. If the S&P 500 was at 2,000, I wouldn't even be considering selling equities.

My initial goal in all of this was to get to a point where I would be in the same position as if I had put 20% down. Paying a large lump sum and recasting seems like the route that would get me closest to that scenario.

Thank you for your thoughts. Very helpful.
The question for any of us when faced with mortgage debt and holding a chunk of equities in taxable at the same time:

"Would you borrow money to invest in taxable?"
"Everywhere is within walking distance if you have the time." ~ Steven Wright

victw
Posts: 142
Joined: Sat Feb 20, 2016 4:07 pm

Re: Sell equities to pay down mortgage

Post by victw » Thu Nov 07, 2019 3:18 pm

Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm
[

Also, the idea of selling equities to pay down the mortgage seems a bit like market timing to me. If the S&P 500 was at 2,000, I wouldn't even be considering selling equities.
Is it market timing or a form of rebalancing?

Vic

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Thu Nov 07, 2019 3:32 pm

CyclingDuo wrote:
Thu Nov 07, 2019 3:09 pm
Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm
Watty wrote:
Thu Nov 07, 2019 1:32 pm
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
A. Sell $50k of equities from my taxable account one time and put it toward the mortgage. I'd end up with around a $1,500 tax bill. This would shave 70 months off my mortgage.
If you do this you should contact your lender before you send the money and ask if they will "recast your Morgage" (Google this). They are not required to but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay your mortage down by 20%(or whatever) then your required monthly payment is reduced by the same percentage. The interest rate and length of the mortage stay the same. This could be important in case something happens like you are laid off, it interest rates go up a lot.

You did not say how much PMI you are paying but if you can get rid of PMI by doing this then this would likely be a good choice.
Triple digit golfer wrote:
Thu Nov 07, 2019 1:07 pm
I am considering one of a few options:
I would add another option to look into.

Refinance into a new 15 year mortage. This would allow you to have the home paid off by the time your 2 years old starts college and that would allow you to use some of the cash flow from your "mortage payment" to pay for the college costs.

I did not try to crunch the numbers but if you can get rid of PMI, get a lower interest rate, and the refinance costs are not too high then it might make sense.
The recasting is an excellent thought.

Currently, I'm not paying PMI. I settled on a 3.50% rate putting 10% down and the rate would have been 3.375% had I put 20% down. So essentially, I am paying it, I suppose, but through the interest rate. Once I hit 20%, it does not change; I'm locked in at 3.50% for the full term. Perhaps a bad deal at the time, but regardless, it is what it is.

I had thought of refinancing but the fees are likely in the thousands. I also don't necessarily like the fact that my mortgage would increase by $650 per month and total PITI would be 24% of my gross pay. We can afford it, but it's starting to get into "uneasy" territory. Mostly mental, I suppose, because $650 per month x 180 months is $117k, and I would have $50k to use toward that, therefore only increasing my additional outlay over the 15 years by $67k.

Also, the idea of selling equities to pay down the mortgage seems a bit like market timing to me. If the S&P 500 was at 2,000, I wouldn't even be considering selling equities.

My initial goal in all of this was to get to a point where I would be in the same position as if I had put 20% down. Paying a large lump sum and recasting seems like the route that would get me closest to that scenario.

Thank you for your thoughts. Very helpful.
The question for any of us when faced with mortgage debt and holding a chunk of equities in taxable at the same time:

"Would you borrow money to invest in taxable?"
Absolutely not.

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Thu Nov 07, 2019 3:33 pm

DCChak wrote:
Thu Nov 07, 2019 2:13 pm
At the risk of further veering into market timing, I'm presuming, since you are here, that the equity investment is in a low cost, broad based index fund or ETF, and not an individual stock that has experienced better-than-the-market appreciation since your buy, amirite?
You are right. Vanguard Total Stock Market Index Fund.

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Thu Nov 07, 2019 3:35 pm

MarkerFM wrote:
Thu Nov 07, 2019 2:41 pm
I would (and actually am doing) choose option B. I try not to make moves that are one way (option A) or another (option C). Option B is a mix of both, and mitigates risks while leaving some flexibility. Once you pay mortgage principal down, it is expensive to re-borrow it. If you are doing it on your own, you can always stop if things change.

I have a 10/1 ARM that is interest-only for ten years and then starts amortizing (I don't actually remember the amortization term). It originally had a large balance, and when I sold some other real estate I put a chunk towards principal. Then, after a time I decided to add an equal amount to my monthly payment to pay down principal. I set this amount so that at the end of the 10 years, the mortgage would be gone. If the market were to crash or I needed the money for something else, I can always stop paying down the principal.
I like Option B. I'm wondering logistically how to do it. Right now, I'm putting a bit into savings, and a lot into retirement accounts. Do I pull from my current equities in taxable on a monthly or quarterly basis? Do I just pay it down from cash flow and when my savings is too low, I sell equities in taxable?

In any of these scenarios, do I change from my current 80/20? Pulling $50k from equities would get me down to only about 77/23.

Snowjob
Posts: 1608
Joined: Sun Jun 28, 2009 10:53 pm

Re: Sell equities to pay down mortgage

Post by Snowjob » Thu Nov 07, 2019 4:33 pm

I sold some taxable investments to get a nice big down payment in on my house. Its great not to deal with PMI and after a 10 year bull run its nice to know I took some off the table permanently.

Not the most efficient economic decision -- yeah we should all have 50 year 3% mortgages forever -- but I actually like not having a monster mortgage and I like to see that more than half of my mortgage payment is principle each month.

My opinion, If you're already doing well on the retirement savings front and this gives you better peace of mind, go for it.

Box5phantom
Posts: 10
Joined: Fri Jul 14, 2017 12:32 pm

Re: Sell equities to pay down mortgage

Post by Box5phantom » Thu Nov 07, 2019 4:50 pm

I think your risk tolerance is not low based on your investment history. I think you have this question because you may regret not lock in the gains from the equity, which is very common. If that is the case, B is a good compromise for you. Personally, I will do C, but you will have less regret for the B.

Home equity in the early years of the mortgage is not that less risky compared to holding equity because of high leverage. The home equity returns are leveraged to home value by your debt to equity ratio. With a 25% home equity, a 5% drop of home value will wipe out 20% of the home equity values. You may not feel the same pain as the equity drops by 20%, because the home equity is not marked to market day by day and is not that liquid for you to access.

I do C because my goal is early retirement, so I look at when I will have enough funds to retire to make a decision with my risk tolerance. I allocate the funds according to this. The home value appreciation has nothing to do with the home equity level as long as mortgage payments are paid on time. Thus, at the end of the day, you compare after tax return of the portfolio you expect to earn to the current term of the mortgage rate you have or you can refinance after cost. I expect after tax return of 60/40 (US equity/bond) portfolio will outperform the market mortgage rates. If the mortgage remaining terms are not long enough, then the decisions become harder as you need to trade off volatility and returns much closely.

From a liquidity and transaction cost point of view, accessing the fund during emergency or economic down turn, balanced fund probably not worse than primary home equity in the early term of the mortgage when leverage is high.

MarkerFM
Posts: 154
Joined: Fri Nov 30, 2018 4:18 pm

Re: Sell equities to pay down mortgage

Post by MarkerFM » Fri Nov 08, 2019 10:17 am

Triple digit golfer wrote:
Thu Nov 07, 2019 3:35 pm
MarkerFM wrote:
Thu Nov 07, 2019 2:41 pm
I would (and actually am doing) choose option B. I try not to make moves that are one way (option A) or another (option C). Option B is a mix of both, and mitigates risks while leaving some flexibility. Once you pay mortgage principal down, it is expensive to re-borrow it. If you are doing it on your own, you can always stop if things change.

I have a 10/1 ARM that is interest-only for ten years and then starts amortizing (I don't actually remember the amortization term). It originally had a large balance, and when I sold some other real estate I put a chunk towards principal. Then, after a time I decided to add an equal amount to my monthly payment to pay down principal. I set this amount so that at the end of the 10 years, the mortgage would be gone. If the market were to crash or I needed the money for something else, I can always stop paying down the principal.
I like Option B. I'm wondering logistically how to do it. Right now, I'm putting a bit into savings, and a lot into retirement accounts. Do I pull from my current equities in taxable on a monthly or quarterly basis? Do I just pay it down from cash flow and when my savings is too low, I sell equities in taxable?

In any of these scenarios, do I change from my current 80/20? Pulling $50k from equities would get me down to only about 77/23.
I would just pay from cash flow and sell equities if needed (I would try to keep net cash flow up so I wouldn't have to sell equities). I also wouldn't worry about the allocation. This won't move the needle much, especially compared with market price moves.

Dude2
Posts: 919
Joined: Fri Jun 08, 2007 3:40 pm
Location: Abu Dhabi

Re: Sell equities to pay down mortgage

Post by Dude2 » Fri Nov 08, 2019 10:40 am

I don't think anyone has said it yet, so I will chime in with D -- direct all of your dividends from your stock to the mortgage, i.e. don't reinvest. If TSM is paying, say 2%, that's $4500 a year, more than your $300 a month figure, and you aren't paying any additional taxes. Just a thought as a compromise option.

In general though, if someone above had not commented on the concept of locking in stock gains, from reading your post, I would not have understood why you wanted to do it. I'm a pay off the mortgage guy, but you do not sound at all like that. People love their mortgages around here. It is seen as cheap money that protects them from deflation and all sorts of other advantages. I agree with the poster above that compared it to using leverage to invest, but, to each their own. Just saying, you sound like someone that is in the hold as much mortgage as possible camp. Therefore, probably C if you want to stick to your principles.

User avatar
Meg77
Posts: 2566
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Sell equities to pay down mortgage

Post by Meg77 » Fri Nov 08, 2019 11:26 am

Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm

My initial goal in all of this was to get to a point where I would be in the same position as if I had put 20% down.
Why is this your goal? Seems pretty arbitrary - which is probably why it's hard for you to figure out what to do. Most banks require 20% down to get the best rate, but that's the only reason that is a standard or target to shoot for. You already have a loan and say you don't want to refinance, so there is no reason at this point to shoot for 20% equity in the home.

You're in a good spot. On track or even ahead of the game for retirement, low fixed rate mortgage, plenty of liquidity.

Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm
How does home equity fit into asset allocation? Is it more like a stock or bond?
It doesn't. Your home is a personal use asset, not a piece of your investment portfolio. You can't rebalance home equity, so it's really a whole separate bucket. It's an asset, just not a liquid, investible asset (similar to how you'd treat an expensive car, or jewelry, or a small business).

However, a mortgage is really a negative bond. In your bond portfolio you own pieces of other people's mortgages and loans and get "fixed income" as they make their payments. But you also have a mortgage which other people own, and you have a "fixed payment" which is income to someone else. Mathematically speaking it doesn't really make sense to borrow (i.e. keep a mortgage) and own bonds. Your bond funds are very unlikely to return more than 3.5%, especially after fees and taxes.

That said, as I explained your mortgage and house aren't really investible assets, so many people of course do buy bonds and keep a 80/20 or other AA before they can afford to pay off their mortgages. But this concept is a good one to keep in mind. And for retirees or people with large portfolios who CAN afford to pay off their mortgages, it's practical advice as well.

I don't think you mentioned how much your mortgage is, but if it's less than $200K you might consider just wiping it out completely. No debt, no payments, and still $500K in retirement and $25K in taxable (which you should convert to cash for an EF if it's invested). Putting just $50K against it doesn't get you super close to paying it off, but it does de-lever you and take some risk out of your financial life. Right now you're borrowing at 3.5% to invest from a balance sheet perspective. Selling when stocks are up to pay off some debt is never a bad idea.

Second best bet would be to refinance into a 15 year fixed mortgage and slash your rate by nearly 1% in the process. You could do this AND put the extra $50K down which would keep your payment from rising as much. Would be worth the refi costs if you plan to keep the loan 3+ years. Yes, your payment would be somewhat higher - but given your large liquid balance it may be worth the risk.

If you're contributing to all your other goals and still have cash flow left, sure, pay an extra $300 a month on the loan. It doesn't move the needle much, but it's better than accumulating more cash than you need, mathematically speaking (cash is earning less than 2% and is taxable; paying off the mortgage "earns" you 3.5%).

Lastly, I just want to point out that your options aren't mutually exclusive. You can sell equities and pay down a chunk of the mortgage AND pay an extra $300 a month AND do nothing (suspend that extra payment) when/if other needs arise. :sharebeer
"An investment in knowledge pays the best interest." - Benjamin Franklin

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Fri Nov 08, 2019 2:46 pm

Meg77 wrote:
Fri Nov 08, 2019 11:26 am
Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm

My initial goal in all of this was to get to a point where I would be in the same position as if I had put 20% down.
Why is this your goal? Seems pretty arbitrary - which is probably why it's hard for you to figure out what to do. Most banks require 20% down to get the best rate, but that's the only reason that is a standard or target to shoot for. You already have a loan and say you don't want to refinance, so there is no reason at this point to shoot for 20% equity in the home.

You're in a good spot. On track or even ahead of the game for retirement, low fixed rate mortgage, plenty of liquidity.

Triple digit golfer wrote:
Thu Nov 07, 2019 1:55 pm
How does home equity fit into asset allocation? Is it more like a stock or bond?
It doesn't. Your home is a personal use asset, not a piece of your investment portfolio. You can't rebalance home equity, so it's really a whole separate bucket. It's an asset, just not a liquid, investible asset (similar to how you'd treat an expensive car, or jewelry, or a small business).

However, a mortgage is really a negative bond. In your bond portfolio you own pieces of other people's mortgages and loans and get "fixed income" as they make their payments. But you also have a mortgage which other people own, and you have a "fixed payment" which is income to someone else. Mathematically speaking it doesn't really make sense to borrow (i.e. keep a mortgage) and own bonds. Your bond funds are very unlikely to return more than 3.5%, especially after fees and taxes.

That said, as I explained your mortgage and house aren't really investible assets, so many people of course do buy bonds and keep a 80/20 or other AA before they can afford to pay off their mortgages. But this concept is a good one to keep in mind. And for retirees or people with large portfolios who CAN afford to pay off their mortgages, it's practical advice as well.

I don't think you mentioned how much your mortgage is, but if it's less than $200K you might consider just wiping it out completely. No debt, no payments, and still $500K in retirement and $25K in taxable (which you should convert to cash for an EF if it's invested). Putting just $50K against it doesn't get you super close to paying it off, but it does de-lever you and take some risk out of your financial life. Right now you're borrowing at 3.5% to invest from a balance sheet perspective. Selling when stocks are up to pay off some debt is never a bad idea.

Second best bet would be to refinance into a 15 year fixed mortgage and slash your rate by nearly 1% in the process. You could do this AND put the extra $50K down which would keep your payment from rising as much. Would be worth the refi costs if you plan to keep the loan 3+ years. Yes, your payment would be somewhat higher - but given your large liquid balance it may be worth the risk.

If you're contributing to all your other goals and still have cash flow left, sure, pay an extra $300 a month on the loan. It doesn't move the needle much, but it's better than accumulating more cash than you need, mathematically speaking (cash is earning less than 2% and is taxable; paying off the mortgage "earns" you 3.5%).

Lastly, I just want to point out that your options aren't mutually exclusive. You can sell equities and pay down a chunk of the mortgage AND pay an extra $300 a month AND do nothing (suspend that extra payment) when/if other needs arise. :sharebeer
Excellent post! In no particular order, here are some thoughts/responses to some of the things that you commented. I appreciate any additional input that you have.

I can only get my rate down by 0.375% by refinancing to a 15 year term, currently. Therefore, I doubt it's worth it. And actually, I am a bit uneasy with locking in a higher monthly payment for 15 years, even with my taxable account cushion. Maybe it's just mental accounting; who knows? We are a one-income household and I am already paid perhaps slightly above average for what I do. That's debatable. If I were to lose my job, most jobs out there are paying 5-10% less than I make now.

My mortgage balance is currently $317k. I agree, if it were $200k or less I may just pay it off.

My idea all along, over the last few years, up until I posted this thread, was:
-Pay no additional principal on the mortgage and instead invest in taxable.
-In 10 or 20 years or whenever, when the market is presumably higher than it is today, I will have the option of locking in equity gains to pay off some or all of the remaining balance.
-Doing this gives me a higher expected return (equities vs. 3.5% borrowing rate) AND liquidity, as we are a one-income household.

However, I guess I just thought with the market up so much in the last few years, and last decade, really, that maybe now is the time that I should lock in some of those gains.

I think what would make me more comfortable, and offer the least potential regret, while being a good compromise, would be to do what the poster above, Dude2 said: don't reinvest dividends in the taxable account and instead direct them to the mortgage. It would be around $3,500 per year.

I am investing approximately $5-6k annually to taxable. Is there much of a difference between doing these two:

A. Keep investments the same, except direct taxable dividends to mortgage principal. Approximately $3,500 annually.
B. Keep reinvesting dividends, but invest $3,500 less to taxable annually and direct it to mortgage principal.

I'm kind of shying away from a lump sum mortgage payment. If I want to "take money off the table" then it really doesn't make sense that I'm still investing. If I feel that stocks are high and I want to scale back a bit, I ask myself why I am still contributing to them.

My entire life I have been a rational, split the difference type person. No big moves, always calculated, etc.

Schlabba
Posts: 153
Joined: Sat May 11, 2019 9:14 am

Re: Sell equities to pay down mortgage

Post by Schlabba » Fri Nov 08, 2019 4:56 pm

Triple digit golfer wrote:
Fri Nov 08, 2019 2:46 pm
My idea all along, over the last few years, up until I posted this thread, was:
-Pay no additional principal on the mortgage and instead invest in taxable.
-In 10 or 20 years or whenever, when the market is presumably higher than it is today, I will have the option of locking in equity gains to pay off some or all of the remaining balance.
-Doing this gives me a higher expected return (equities vs. 3.5% borrowing rate) AND liquidity, as we are a one-income household.
I like that plan. It has lower risk because your money is liquid, and it has a higher return in the long run. What more could you want?
IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

CurlyDave
Posts: 1311
Joined: Thu Jul 28, 2016 11:37 am

Re: Sell equities to pay down mortgage

Post by CurlyDave » Sat Nov 09, 2019 6:14 am

Schlabba wrote:
Fri Nov 08, 2019 4:56 pm
Triple digit golfer wrote:
Fri Nov 08, 2019 2:46 pm
My idea all along, over the last few years, up until I posted this thread, was:
-Pay no additional principal on the mortgage and instead invest in taxable.
-In 10 or 20 years or whenever, when the market is presumably higher than it is today, I will have the option of locking in equity gains to pay off some or all of the remaining balance.
-Doing this gives me a higher expected return (equities vs. 3.5% borrowing rate) AND liquidity, as we are a one-income household.
I like that plan. It has lower risk because your money is liquid, and it has a higher return in the long run. What more could you want?
+1

I have lived that plan during my working years and now in retirement. It has worked well for us.

For the people who ask: would you borrow money to invest in equities? IMHO the answer is not as simple as they make it out to be. In my case it is a resounding IT DEPENDS.

Would I borrow money on margin -- no. That is a dangerous game with a callable loan at high interest rates.

Would I borrow money on a mortgage? Heck yes. A non-callable, sometimes non-recourse loan at modest interest rates well below the expected CAGR of equities. Just do not get over-extended. The OP has seen the success possible.

1130Super
Posts: 22
Joined: Thu Nov 07, 2019 8:59 am
Location: Minnesota

Re: Sell equities to pay down mortgage

Post by 1130Super » Sat Nov 09, 2019 8:44 am

Some people sleep better at nite by locking away cash long term paying down mortgage. I would sleep better by putting/keeping Stocks and a little cash in a taxable account. I think it’s insane how so many people think paying down the mortgage early is the safe approach. If you lose your job and have 50k in a taxable account it is going to be ready when you might need it. How easy would it be to get some equity if you pay your mortgage down?

User avatar
JoeRetire
Posts: 3566
Joined: Tue Jan 16, 2018 2:44 pm

Re: Sell equities to pay down mortgage

Post by JoeRetire » Sat Nov 09, 2019 8:49 am

1130Super wrote:
Sat Nov 09, 2019 8:44 am
Some people sleep better at nite by locking away cash long term paying down mortgage. I would sleep better by putting/keeping Stocks and a little cash in a taxable account. I think it’s insane how so many people think paying down the mortgage early is the safe approach. If you lose your job and have 50k in a taxable account it is going to be ready when you might need it. How easy would it be to get some equity if you pay your mortgage down?
I think you are being a bit harsh.

Hopefully the "pay down the mortgage" folks aren't completely depleting all their assets. Hopefully they still retain a sufficient emergency fund.

Otherwise it would be insane. I don't think (most) folks here are insane, just opinionated.

My late mother in law slept better at night by keeping cash under her mattress, and under her doilies, and in her raincoat pocket, and in her bible, and in her jewelry box, etc, etc. We found this out while cleaning out her house after she passed. She wasn't insane - she just came from a different financial era.
Don't be a lemming.

Topic Author
Triple digit golfer
Posts: 3368
Joined: Mon May 18, 2009 5:57 pm

Re: Sell equities to pay down mortgage

Post by Triple digit golfer » Sat Nov 09, 2019 9:25 pm

Schlabba wrote:
Fri Nov 08, 2019 4:56 pm
Triple digit golfer wrote:
Fri Nov 08, 2019 2:46 pm
My idea all along, over the last few years, up until I posted this thread, was:
-Pay no additional principal on the mortgage and instead invest in taxable.
-In 10 or 20 years or whenever, when the market is presumably higher than it is today, I will have the option of locking in equity gains to pay off some or all of the remaining balance.
-Doing this gives me a higher expected return (equities vs. 3.5% borrowing rate) AND liquidity, as we are a one-income household.
I like that plan. It has lower risk because your money is liquid, and it has a higher return in the long run. What more could you want?
Tough to argue with that.

Post Reply