If a mortgage is a negative bond . . .

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sesq
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If a mortgage is a negative bond . . .

Post by sesq » Wed Mar 25, 2020 7:41 am

Do I pull bond money out of my 401(k) and payoff my mortgage?

In the senate bill there is a provision that lets people pull up to 100K from their retirement accounts and pay no penalty, repay the distribution over three years and/or spread the income taxes over 3 years. There is also a provision that doubles 401(k) loans to 100K from 50K (repaid over 5 years). I have a mortgage of 242K @ 3.125% not deductible because I tax the standard deduction. In my 401(k) I have about 216K of bonds. I would need to pull about 150K from my retirement bonds to pay off the mortgage (I have some other non EF cash).

Its a small tweak but ever since I read (Allan Roth's?) comment "why would you lend at 1-2% and pay 3%" it has bothered me. Until now I had now practical way to access the cash. With the legislative change I can access the bond investment. I would backstop my position with a HELOC as additional liquidity. The house already has substantial equity as it is worth around 700K. I think that I could repay the distribution over the three year period. Worst case I got a penalty free distribution spread over 3 years. I am 47 and planning to FIRE around 55-56 when the kids are out.

mega317
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Re: If a mortgage is a negative bond . . .

Post by mega317 » Wed Mar 25, 2020 8:23 am

It doesn't make a lot of sense to me to pay unnecessary taxes. How about using some of your taxable account and adjusting your 401k so as not to change your overall asset allocation?
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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firebirdparts
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Re: If a mortgage is a negative bond . . .

Post by firebirdparts » Wed Mar 25, 2020 8:24 am

Moving money around ultimately is just marginal returns, which don't really matter much. It'll be fine either way. Whereas not spending a dollar nets you a dollar. Lots of practical factors come into it, like what-if-I-get-laid-off and I-had-to-move-to-a-new-town and I'm not really commenting on that.
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Re: If a mortgage is a negative bond . . .

Post by MotoTrojan » Wed Mar 25, 2020 8:25 am

[quote=mega317 post_id=5131383 time=1585142618 user_id=108779]
It doesn't make a lot of sense to me to pay unnecessary taxes. How about using some of your taxable account and adjusting your 401k so as not to change your overall asset allocation?
[/quote]

+1. Don’t use precious tax-advantaged space. Best case you have taxable equities at a loss; sell them, move bonds to similar equity funds in 401k, and it’s a win-win; payoff mortgage and harvest losses.

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whodidntante
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Re: If a mortgage is a negative bond . . .

Post by whodidntante » Wed Mar 25, 2020 8:27 am

We aren't allowed to discuss proposed legislation, only law.

However, your question is completely within forum rules if we rephrase it as "should I take a 50k, three year 401k loan that I'm certain will not result in penalties to payoff my mortgage?" If you have 50k in fixed income in the 401k, and you then trade to eliminate fixed income in proportion, then I think the answer is yes. The reason is that the effect on portfolio risk is the same, because you are using a long position in fixed income (bonds) to offset a short position (a mortgage). However, the spread is favorable, so you should do it if you're a robot.

However, some people like to have additional money in their control because it helps them avoid behavioral mistakes, or in case they need it. If you were an airline employee, you would understand.

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Kenkat
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Re: If a mortgage is a negative bond . . .

Post by Kenkat » Wed Mar 25, 2020 8:54 am

One other consideration is that you are giving up liquidity by doing this. Once you pay off the mortgage, you are in effect locking that money up into your house. The only way to get it back out is to either sell the house or borrow against it using a HELOC, paying fees and interest to access the tied up money.

Triple digit golfer
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Re: If a mortgage is a negative bond . . .

Post by Triple digit golfer » Wed Mar 25, 2020 8:55 am

A mortgage is not a negative bond.

Make your decision with that assumption.

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9-5 Suited
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Re: If a mortgage is a negative bond . . .

Post by 9-5 Suited » Wed Mar 25, 2020 9:06 am

Triple digit golfer wrote:
Wed Mar 25, 2020 8:55 am
A mortgage is not a negative bond.

Make your decision with that assumption.
Regardless of that debate where people will entrench on each side, it’s more fundamental to just acknowledge the pros and cons directly.

Holdings bonds is more liquid and better for rebalancing if one is concerned with that feature (especially if the bonds are LTT).

Paying off the mortgage is likely a higher rate of return, as the spread in today’s world tends to be negative for the bond holder. It also comes with a slew of potential emotional benefits.

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Re: If a mortgage is a negative bond . . .

Post by oldcomputerguy » Wed Mar 25, 2020 9:10 am

This thread has run its course and is locked. Speculation about future legislation is prohibited by forum policy, see: Unacceptable Topics
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The whole point of the policy is to (1) eliminate contentious disagreements that result from these discussions and (2) keep investors from making bad decisions. Proposed legislation changes many times between the time it's introduced and signed into law. When the bill is signed into law, we'll know more about its impact on investors, and it can be discussed at that time.
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Re: If a mortgage is a negative bond . . .

Post by LadyGeek » Fri Mar 27, 2020 4:23 pm

The bill has been signed into law. This thread is reopened to continue the discussion.
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Phineas J. Whoopee
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Re: If a mortgage is a negative bond . . .

Post by Phineas J. Whoopee » Fri Mar 27, 2020 6:11 pm

A mortgage is equivalent to what would happen if one issued a bond. There are set dates on which you will pay principal and interest.

The term negative bond may not be the best, but it is in fact the opposite of buying a bond with those characteristics. Mortage-backed securities come to mind. It is indeed the inverse of an asset.

For net worth calculations, and no I don't want to restart an argument about what the standard financial term net worth means, one would include an estimate of the market value of the property, and the amount of debt.

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milktoast
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Re: If a mortgage is a negative bond . . .

Post by milktoast » Fri Mar 27, 2020 7:39 pm

Will your regular p&i payments (not escrow) over the next three years cover the balance of your loan?

If so, you could do this and come out slightly ahead. Pay off now by selling low yield bonds then buy them back over three years.

But if you are that close to finished with your mortgage, it’s probably not worth the bother.

alex_686
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Re: If a mortgage is a negative bond . . .

Post by alex_686 » Fri Mar 27, 2020 8:56 pm

Triple digit golfer wrote:
Wed Mar 25, 2020 8:55 am
A mortgage is not a negative bond.

Make your decision with that assumption.
How is it not a negative bond? A bond is a obligation for one party to pay the other? My bond books have long chapters on mortgages, and my investment books all put mortgages in the fixed income section of asset allocation.

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Re: If a mortgage is a negative bond . . .

Post by grabiner » Fri Mar 27, 2020 9:32 pm

sesq wrote:
Wed Mar 25, 2020 7:41 am
Do I pull bond money out of my 401(k) and payoff my mortgage?

In the senate bill there is a provision that lets people pull up to 100K from their retirement accounts and pay no penalty, repay the distribution over three years and/or spread the income taxes over 3 years. There is also a provision that doubles 401(k) loans to 100K from 50K (repaid over 5 years). I have a mortgage of 242K @ 3.125% not deductible because I tax the standard deduction. In my 401(k) I have about 216K of bonds. I would need to pull about 150K from my retirement bonds to pay off the mortgage (I have some other non EF cash).
I probably wouldn't withdraw from the 401(k) to do this. You would gain the difference between bond yields and your mortgage rate. However, you would lose the difference between your tax rate now and your tax rate in retirement; if you are in a 22% bracket now and will be in a 12% bracket when you draw down your 401(k), you are taking an 11% loss in purchasing power (that is, $100K withdrawn now becomes $78K after tax, versus $88K if you wait until you retire). In addition, if you are maxing out the 401(k), you permanently lose the tax-deferred gains on the 401(k), which would otherwise continue for years after the mortgage is paid off.

But taking out a loan from the 401(k) to pay off the mortgage may be a good idea, depending on your terms. If the 401(k) loan rate is equal to the rate on the bond fund in the 401(k), and you take out the loan with money that was in the bond fund, then your 401(k) balance will be the same whether you take out the loan or not; you will lose interest at the bond fund rate, but save interest at the mortgage rate. Essentially, you are refinancing your mortgage at a lower rate. (Two caveats: doing this will prevent you from taking out another loan if you need it, and will be costly if you leave your job and the loan balance becomes a taxable distribution.)
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vipertom1970
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Re: If a mortgage is a negative bond . . .

Post by vipertom1970 » Fri Mar 27, 2020 9:39 pm

Kenkat wrote:
Wed Mar 25, 2020 8:54 am
One other consideration is that you are giving up liquidity by doing this. Once you pay off the mortgage, you are in effect locking that money up into your house. The only way to get it back out is to either sell the house or borrow against it using a HELOC, paying fees and interest to access the tied up money.
but you have much better cash flow to invest if you don't have a mortgage. I never understood the logic of holding crapload of bonds in a portfolio and have a mortgage vs no mortgage and be 100% in equities.
Last edited by vipertom1970 on Fri Mar 27, 2020 10:19 pm, edited 1 time in total.

Triple digit golfer
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Re: If a mortgage is a negative bond . . .

Post by Triple digit golfer » Fri Mar 27, 2020 9:51 pm

alex_686 wrote:
Fri Mar 27, 2020 8:56 pm
Triple digit golfer wrote:
Wed Mar 25, 2020 8:55 am
A mortgage is not a negative bond.

Make your decision with that assumption.
How is it not a negative bond? A bond is a obligation for one party to pay the other? My bond books have long chapters on mortgages, and my investment books all put mortgages in the fixed income section of asset allocation.
It may mathematically function like a "negative bond" (is that even a real thing?), but that's where it ends.

Can you rebalance out of a mortgage?

Is a mortgage included in an AA?

If someone has $200k in stocks, $100k in bonds and a $200k mortgage, what is that investors AA?

If my desired AA is 80/20 and I have a $300k portfolio and a $200k mortgage, how much if the $300k should I have in stocks and how much in bonds?

Can a mortgage be liquidated to pay bills?

Monsterflockster
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Re: If a mortgage is a negative bond . . .

Post by Monsterflockster » Fri Mar 27, 2020 10:01 pm

sesq wrote:
Wed Mar 25, 2020 7:41 am
Do I pull bond money out of my 401(k) and payoff my mortgage?

In the senate bill there is a provision that lets people pull up to 100K from their retirement accounts and pay no penalty, repay the distribution over three years and/or spread the income taxes over 3 years. There is also a provision that doubles 401(k) loans to 100K from 50K (repaid over 5 years). I have a mortgage of 242K @ 3.125% not deductible because I tax the standard deduction. In my 401(k) I have about 216K of bonds. I would need to pull about 150K from my retirement bonds to pay off the mortgage (I have some other non EF cash).

Its a small tweak but ever since I read (Allan Roth's?) comment "why would you lend at 1-2% and pay 3%" it has bothered me. Until now I had now practical way to access the cash. With the legislative change I can access the bond investment. I would backstop my position with a HELOC as additional liquidity. The house already has substantial equity as it is worth around 700K. I think that I could repay the distribution over the three year period. Worst case I got a penalty free distribution spread over 3 years. I am 47 and planning to FIRE around 55-56 when the kids are out.
Not to hyjack the thread but does anyone know in regards to the new law referenced above, if you have to pay back the 403b withdrawal to the same vendor? I’ve been trying to get money rolled over from valic to Vanguard for years but I need notarized signatures from myself, my wife and the HR rep (an hour drive and a day off work). Then they tell me forms expired and I need new forms. Then I go through it again and they come up with some other excuse. Most recently (my third time in two years through this) they are not able to process due to the coronavirus and my notary will not be in the 60 day required window and so I’ll need to start again.

So I’ve had it. Can I withdraw with this law and then contribute to my vanguard account? Or does it need to be with Valic?

Hyperchicken
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Re: If a mortgage is a negative bond . . .

Post by Hyperchicken » Fri Mar 27, 2020 11:09 pm

Triple digit golfer wrote:
Fri Mar 27, 2020 9:51 pm
Can a mortgage be liquidated to pay bills?
Since mortgage is (sort of) a negative bond, it can absolutely be liquidated to pay negative bills.

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