Paying off sub 4% mortgage interest rate early

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
surfstar
Posts: 2267
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: Paying off sub 4% mortgage interest rate early

Post by surfstar »

No.

Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.

3% +/- 30 year mortgages should not be paid off early, IMO.
tryingtogetahead
Posts: 84
Joined: Tue Apr 07, 2020 11:45 am

Re: Paying off sub 4% mortgage interest rate early

Post by tryingtogetahead »

Andyrunner wrote: Fri Sep 11, 2020 7:41 am 2.99% 15 year paid if off a few months ago.

Why? Several reasons.

1) I like cash flow
2) I don't like debt
3) I have this thing where I can't let things linger. Can't have unread emails in my inbox, when I start looking at buying something, I gotta research, shop and pull the trigger soon, my only saving grace is I get distracted and focus on something else for a short time. Mortgage was probably the biggest one, kept sitting in my mind, I'd review it every month (sometimes twice) to see what I can do to pay it off early, how much I owed, what interest I'd save. Now that its done, one less thing to think about.
I felt like I was looking in the mirror reading your post. I totally get it. I cannot wait for tomorrow to do what can be accomplished today. Paying off my mortgage freed alot of brain capacity for me to divert to other things. I also paid whatever cash I had left over each month toward my mortgage.
User avatar
Toons
Posts: 13825
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Paying off sub 4% mortgage interest rate early

Post by Toons »

Admiral wrote: Fri Sep 11, 2020 12:40 pm
Toons wrote: Fri Sep 11, 2020 12:09 pm I am not
But
I Would
If I had a Mortgage




:mrgreen:
Toons I always enjoy your Haiku-esque responses! :happy

Gracias :sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

We are paying off our 2.75% mortgage by diverting supposed bond contributions into the mortgage. There is a good chance we will sell this house in a couple of years making the decision even better for us. Can’t get a better guaranteed return than 2.75%.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
User avatar
willthrill81
Posts: 21419
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Paying off sub 4% mortgage interest rate early

Post by willthrill81 »

grettman wrote: Fri Sep 11, 2020 4:39 pm
willthrill81 wrote: Fri Sep 11, 2020 1:07 pm
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
We paid off our 3.375% mortgage back in February for several reasons. First, despite having an aggressive investment approach, neither my wife nor I felt comfortable using our primary residence to leverage our investments, which is precisely what having a mortgage while you're investing does. Second, it provided us a reasonable, guaranteed return on our capital. Third, paying off mortgage improved our cash flow by substantially reducing our essential expenses, which is very meaningful in the current environment especially.

For the sake of comparison, over the five year in which we paid off our mortgage, TBM returned about 3.27% on a pre-tax basis (time-weighted, not money-weighted), so paying off our 3.375% post-tax mortgage definitely came out ahead in that regard. And 3.375% nominal is almost certainly far more than what TBM will return over the next decade.
I’m in a very similar situation.

What are you doing with the freed up cash flow?
Plowing it into our portfolio. Our saving rate is 50%.
“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
User avatar
changingtimes
Posts: 264
Joined: Mon Jul 24, 2017 9:28 am

Re: Paying off sub 4% mortgage interest rate early

Post by changingtimes »

grettman wrote: Fri Sep 11, 2020 4:39 pm
I’m in a very similar situation.

What are you doing with the freed up cash flow?
Not who you asked, but mine (an extra $400/month) will be going into my Roth 401k and then after tax for in-plan conversions.
smj
Posts: 11
Joined: Fri Apr 03, 2015 1:50 pm

Re: Paying off sub 4% mortgage interest rate early

Post by smj »

I’m paying off our 3% 15yr mort this month with 9 years left on it for one main reason:
Peace of mind
MrJedi
Posts: 343
Joined: Wed May 06, 2020 11:42 am

Re: Paying off sub 4% mortgage interest rate early

Post by MrJedi »

hornet96 wrote: Fri Sep 11, 2020 7:22 am
petulant wrote: Fri Sep 11, 2020 7:19 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
Not everybody has access to those rates, whether due to state/market, credit score, or smaller mortgage balance.
Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
Best I could get was a no cost 30 year fixed at 3.375%. My loan balance is on the smaller side, 120k. I still went through with it as I was coming from 3.875%. 50 bps on a relatively small balance still adds up. Yes the paperwork is a hassle but worth it. We fuss on this forum over 5 bps sometimes.

As for the thread, no, not paying it off early at all. Still in mid accumulation stage, mostly equities and only a modest amount of fixed income for safety (~1 year expenses). If I were in bonds for long term growth rather than safety, I would redirect toward the mortgage instead.
MDfan
Posts: 402
Joined: Tue Oct 18, 2016 7:32 am

Re: Paying off sub 4% mortgage interest rate early

Post by MDfan »

Just refinanced to a 15-year, 2.625% mortgage. Owe about $290k. Retiring next year. No plans to pay it off early but we'll probably sell the house within 5-7 years.
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

MDfan wrote: Sat Sep 12, 2020 8:17 am Just refinanced to a 15-year, 2.625% mortgage. Owe about $290k. Retiring next year. No plans to pay it off early but we'll probably sell the house within 5-7 years.
It’s similar to our situation but I figured in the next few years before I sell my home I am predicting that bonds will not deliver over 2.75% (our mortgage.) With that in mind I am putting cash into our home equity getting my guaranteed 2.75% which I will be able to cash out when we move in a few years. I am diverting new contributions that should go into bonds to preserve my AA instead into the mortgage. I’m letting my AA slide a little. We have over 5 years expenses already in bonds which is the minimum I’m willing to hold.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Topic Author
Frugalbear
Posts: 252
Joined: Sun Jun 02, 2019 7:35 am

Re: Paying off sub 4% mortgage interest rate early

Post by Frugalbear »

MrJedi wrote: Sat Sep 12, 2020 7:54 am
hornet96 wrote: Fri Sep 11, 2020 7:22 am
petulant wrote: Fri Sep 11, 2020 7:19 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
Not everybody has access to those rates, whether due to state/market, credit score, or smaller mortgage balance.
Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
Best I could get was a no cost 30 year fixed at 3.375%. My loan balance is on the smaller side, 120k. I still went through with it as I was coming from 3.875%. 50 bps on a relatively small balance still adds up. Yes the paperwork is a hassle but worth it. We fuss on this forum over 5 bps sometimes.

As for the thread, no, not paying it off early at all. Still in mid accumulation stage, mostly equities and only a modest amount of fixed income for safety (~1 year expenses). If I were in bonds for long term growth rather than safety, I would redirect toward the mortgage instead.
Yes, I was reading that mega finance thread and I was in awww how people were getting such low rates with no cost. The best i could do is 2.9% and it cost me $1000. I was at 3.75 30yr (26 to go) Made my first payment this month...$851--$674 to princ 177 to interest. I was paying over $300 in interest before!
Topic Author
Frugalbear
Posts: 252
Joined: Sun Jun 02, 2019 7:35 am

Re: Paying off sub 4% mortgage interest rate early

Post by Frugalbear »

Admiral wrote: Fri Sep 11, 2020 12:40 pm
Toons wrote: Fri Sep 11, 2020 12:09 pm I am not
But
I Would
If I had a Mortgage




:mrgreen:
Toons I always enjoy your Haiku-esque responses! :happy
+1
User avatar
willthrill81
Posts: 21419
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Paying off sub 4% mortgage interest rate early

Post by willthrill81 »

Frugalbear wrote: Sat Sep 12, 2020 10:00 am
MrJedi wrote: Sat Sep 12, 2020 7:54 am
hornet96 wrote: Fri Sep 11, 2020 7:22 am
petulant wrote: Fri Sep 11, 2020 7:19 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
Not everybody has access to those rates, whether due to state/market, credit score, or smaller mortgage balance.
Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
Best I could get was a no cost 30 year fixed at 3.375%. My loan balance is on the smaller side, 120k. I still went through with it as I was coming from 3.875%. 50 bps on a relatively small balance still adds up. Yes the paperwork is a hassle but worth it. We fuss on this forum over 5 bps sometimes.

As for the thread, no, not paying it off early at all. Still in mid accumulation stage, mostly equities and only a modest amount of fixed income for safety (~1 year expenses). If I were in bonds for long term growth rather than safety, I would redirect toward the mortgage instead.
Yes, I was reading that mega finance thread and I was in awww how people were getting such low rates with no cost. The best i could do is 2.9% and it cost me $1000. I was at 3.75 30yr (26 to go) Made my first payment this month...$851--$674 to princ 177 to interest. I was paying over $300 in interest before!
Clark Howard said yesterday that the average 15 and 30 year rates across the country were something like 2.38% and 2.89%, respectively, so 2.9% isn't bad.
“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
Topic Author
Frugalbear
Posts: 252
Joined: Sun Jun 02, 2019 7:35 am

Re: Paying off sub 4% mortgage interest rate early

Post by Frugalbear »

willthrill81 wrote: Sat Sep 12, 2020 10:01 am
Frugalbear wrote: Sat Sep 12, 2020 10:00 am
MrJedi wrote: Sat Sep 12, 2020 7:54 am
hornet96 wrote: Fri Sep 11, 2020 7:22 am
petulant wrote: Fri Sep 11, 2020 7:19 am

Not everybody has access to those rates, whether due to state/market, credit score, or smaller mortgage balance.
Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
Best I could get was a no cost 30 year fixed at 3.375%. My loan balance is on the smaller side, 120k. I still went through with it as I was coming from 3.875%. 50 bps on a relatively small balance still adds up. Yes the paperwork is a hassle but worth it. We fuss on this forum over 5 bps sometimes.

As for the thread, no, not paying it off early at all. Still in mid accumulation stage, mostly equities and only a modest amount of fixed income for safety (~1 year expenses). If I were in bonds for long term growth rather than safety, I would redirect toward the mortgage instead.
Yes, I was reading that mega finance thread and I was in awww how people were getting such low rates with no cost. The best i could do is 2.9% and it cost me $1000. I was at 3.75 30yr (26 to go) Made my first payment this month...$851--$674 to princ 177 to interest. I was paying over $300 in interest before!
Clark Howard said yesterday that the average 15 and 30 year rates across the country were something like 2.38% and 2.89%, respectively, so 2.9% isn't bad.
Im extremely happy with it! I think the reason behind me not being able to set something smaller and less fees was because i "only" owe 123k on my mortgage.

Its tempting to throw extra money on it, but its pretty dang cheap $851/month...$674principal $177Interest
User avatar
willthrill81
Posts: 21419
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Paying off sub 4% mortgage interest rate early

Post by willthrill81 »

Frugalbear wrote: Sat Sep 12, 2020 10:11 am
willthrill81 wrote: Sat Sep 12, 2020 10:01 am
Frugalbear wrote: Sat Sep 12, 2020 10:00 am
MrJedi wrote: Sat Sep 12, 2020 7:54 am
hornet96 wrote: Fri Sep 11, 2020 7:22 am

Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
Best I could get was a no cost 30 year fixed at 3.375%. My loan balance is on the smaller side, 120k. I still went through with it as I was coming from 3.875%. 50 bps on a relatively small balance still adds up. Yes the paperwork is a hassle but worth it. We fuss on this forum over 5 bps sometimes.

As for the thread, no, not paying it off early at all. Still in mid accumulation stage, mostly equities and only a modest amount of fixed income for safety (~1 year expenses). If I were in bonds for long term growth rather than safety, I would redirect toward the mortgage instead.
Yes, I was reading that mega finance thread and I was in awww how people were getting such low rates with no cost. The best i could do is 2.9% and it cost me $1000. I was at 3.75 30yr (26 to go) Made my first payment this month...$851--$674 to princ 177 to interest. I was paying over $300 in interest before!
Clark Howard said yesterday that the average 15 and 30 year rates across the country were something like 2.38% and 2.89%, respectively, so 2.9% isn't bad.
Im extremely happy with it! I think the reason behind me not being able to set something smaller and less fees was because i "only" owe 123k on my mortgage.

Its tempting to throw extra money on it, but its pretty dang cheap $851/month...$674principal $177Interest
It almost certainly makes more mathematical sense to pay down a 2.9% mortgage than to buy any fixed income these days, unless you really need the liquidity the latter provides.
“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
nolesrule
Posts: 1701
Joined: Thu Feb 26, 2015 10:59 am

Re: Paying off sub 4% mortgage interest rate early

Post by nolesrule »

willthrill81 wrote: Sat Sep 12, 2020 10:13 am
It almost certainly makes more mathematical sense to pay down a 2.9% mortgage than to buy any fixed income these days, unless you really need the liquidity the latter provides.
For me that's actually what makes it difficult to pay down the mortgage. My budget and cash needs are part of my overall asset allocation. So money I don't want to hold in cash goes into stocks, and I rebalance in tax advantaged accounts. I can't squeeze the same liquidity out of home equity. I keep 6 months of net income in cash, but my total budget currently sits at 10.5 months of income.
3funder
Posts: 1485
Joined: Sun Oct 15, 2017 9:35 pm

Re: Paying off sub 4% mortgage interest rate early

Post by 3funder »

Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Goal33
Posts: 1506
Joined: Sun Apr 12, 2015 12:30 pm

Re: Paying off sub 4% mortgage interest rate early

Post by Goal33 »

3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
3funder
Posts: 1485
Joined: Sun Oct 15, 2017 9:35 pm

Re: Paying off sub 4% mortgage interest rate early

Post by 3funder »

Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
MrJedi
Posts: 343
Joined: Wed May 06, 2020 11:42 am

Re: Paying off sub 4% mortgage interest rate early

Post by MrJedi »

3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
You have to ask for lender credits that cover closing costs (sections A, B, C, and E).

This will make your rate go up, it's essentially like buying "negative" points. Instead of paying up front to lower the rate, you are increasing the rate to receive credits toward closing costs. Larger loan balances usually can get more credits as they are more profitable for the lender. The really great no cost rates you see are for like 300-400k balances. Less than 1500-200k or so it will be tough to get 30 year fixed below 3% with enough lender credits.

Cash out refinances will not be as good either, as they are considered more risky than a plain rate and term refinance, and thus that will bring up the rate and/or closing costs.
User avatar
ohboy!
Posts: 315
Joined: Thu Jan 04, 2018 2:21 pm

Re: Paying off sub 4% mortgage interest rate early

Post by ohboy! »

I paid off my 3.7% this year. Can’t get even close to that fixed return.
Goal33
Posts: 1506
Joined: Sun Apr 12, 2015 12:30 pm

Re: Paying off sub 4% mortgage interest rate early

Post by Goal33 »

3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
I’m in the process now. I’m getting 2.5% but I locked on the lowest date. Depending on your circumstances you can likely get 3% or lower, though.
User avatar
Meaty
Posts: 796
Joined: Mon Jul 22, 2013 7:35 pm
Location: Texas

Re: Paying off sub 4% mortgage interest rate early

Post by Meaty »

ohboy! wrote: Sat Sep 12, 2020 1:15 pm I paid off my 3.7% this year. Can’t get even close to that fixed return.
I paid off 3.6% about 2 years ago. Best decision ever
"Discipline equals Freedom" - Jocko Willink
User avatar
BrandonBogle
Posts: 3329
Joined: Mon Jan 28, 2013 11:19 pm

Re: Paying off sub 4% mortgage interest rate early

Post by BrandonBogle »

surfstar wrote: Fri Sep 11, 2020 4:46 pm No.

Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.

3% +/- 30 year mortgages should not be paid off early, IMO.
Isn’t the current EE bond rate 0.1% for the first 20 years and then potentially different the last 10?
Treasury Direct wrote: https://www.treasurydirect.gov/indiv/re ... ndafer.htm

What interest will I get if I buy an EE Bond now?

The annual interest rate for EE Bonds issued from May 1, 2020, through October 31, 2020, is 0.10%.
EE Bonds issued in May 2005 and after earn interest until they reach 30 years or you cash them, whichever comes first. They earn a fixed rate of interest. For the first 20 years, EE bonds earn the same fixed rate that was set when the bond was issued. We may change the rate or the way an EE Bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts.
User avatar
willthrill81
Posts: 21419
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Paying off sub 4% mortgage interest rate early

Post by willthrill81 »

BrandonBogle wrote: Sat Sep 12, 2020 7:21 pm
surfstar wrote: Fri Sep 11, 2020 4:46 pm No.

Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.

3% +/- 30 year mortgages should not be paid off early, IMO.
Isn’t the current EE bond rate 0.1% for the first 20 years and then potentially different the last 10?
Treasury Direct wrote: https://www.treasurydirect.gov/indiv/re ... ndafer.htm

What interest will I get if I buy an EE Bond now?

The annual interest rate for EE Bonds issued from May 1, 2020, through October 31, 2020, is 0.10%.
EE Bonds issued in May 2005 and after earn interest until they reach 30 years or you cash them, whichever comes first. They earn a fixed rate of interest. For the first 20 years, EE bonds earn the same fixed rate that was set when the bond was issued. We may change the rate or the way an EE Bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts.
EE bonds have a special provision whereby they double in nominal value from issuance after being held for 20 full years. That equates to a 3.53% interest rate.

From the page you reference:
Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.
surfstar wrote: Fri Sep 11, 2020 4:46 pm Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.
An argument can definitely be made to buy EE bonds instead. But there are some caveats to that approach. First, you're limited to buying $10k of EE bonds per person, whereas there is no limit to how much you can pay down your mortgage (until it's paid off, of course).

Second, in a real way, EE bonds are even less liquid than home equity; unless held for the full 20 years, the interest rate is .1% nominal, which means that inflation is going to kick you in the teeth progressively harder until you finally reach the 20 year mark. You can access the face amount after the waiting period, but that's all. No other widely available investment vehicle that I'm aware of operates in this manner.

Third, EE bonds do not improve your cash flow, while paying off your mortgage does.

Fourth, unless you're able to deduct your mortgage interest, which few do any more, your mortgage rate is post-tax, while EE bonds' effective 3.53% is pre-tax, though it 'grows' tax-free due to the nature of how the one-time adjustment is made so that they double in face value after 20 years.

Fifth, failure to buy EE bonds does not have quite the same consequences as failing to pay your mortgage.
“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
User avatar
BrandonBogle
Posts: 3329
Joined: Mon Jan 28, 2013 11:19 pm

Re: Paying off sub 4% mortgage interest rate early

Post by BrandonBogle »

willthrill81 wrote: Sat Sep 12, 2020 7:34 pm
BrandonBogle wrote: Sat Sep 12, 2020 7:21 pm
surfstar wrote: Fri Sep 11, 2020 4:46 pm No.

Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.

3% +/- 30 year mortgages should not be paid off early, IMO.
Isn’t the current EE bond rate 0.1% for the first 20 years and then potentially different the last 10?
Treasury Direct wrote: https://www.treasurydirect.gov/indiv/re ... ndafer.htm

What interest will I get if I buy an EE Bond now?

The annual interest rate for EE Bonds issued from May 1, 2020, through October 31, 2020, is 0.10%.
EE Bonds issued in May 2005 and after earn interest until they reach 30 years or you cash them, whichever comes first. They earn a fixed rate of interest. For the first 20 years, EE bonds earn the same fixed rate that was set when the bond was issued. We may change the rate or the way an EE Bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts.
EE bonds have a special provision whereby they double in nominal value from issuance after being held for 20 full years. That equates to a 3.53% interest rate.

From the page you reference:
Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.
:oops:

Thanks Will! I knew that, but somehow the :idea: didn’t trigger to recognize that’s what surfstar meant!
surfstar
Posts: 2267
Joined: Fri Sep 13, 2013 12:17 pm
Location: Santa Barbara, CA

Re: Paying off sub 4% mortgage interest rate early

Post by surfstar »

BrandonBogle wrote: Sat Sep 12, 2020 7:50 pm
willthrill81 wrote: Sat Sep 12, 2020 7:34 pm
BrandonBogle wrote: Sat Sep 12, 2020 7:21 pm
surfstar wrote: Fri Sep 11, 2020 4:46 pm No.

Why not buy EE bonds instead? 3.5% guaranteed in 20 years, plus potential tax savings of mortgage interest deduction. After 1 year, more liquid than home equity, also.

3% +/- 30 year mortgages should not be paid off early, IMO.
Isn’t the current EE bond rate 0.1% for the first 20 years and then potentially different the last 10?
Treasury Direct wrote: https://www.treasurydirect.gov/indiv/re ... ndafer.htm

What interest will I get if I buy an EE Bond now?

The annual interest rate for EE Bonds issued from May 1, 2020, through October 31, 2020, is 0.10%.
EE Bonds issued in May 2005 and after earn interest until they reach 30 years or you cash them, whichever comes first. They earn a fixed rate of interest. For the first 20 years, EE bonds earn the same fixed rate that was set when the bond was issued. We may change the rate or the way an EE Bond earns interest for the last 10 years of the bond's 30-year life. If we make a change, we have to do it before that 10-year period starts.
EE bonds have a special provision whereby they double in nominal value from issuance after being held for 20 full years. That equates to a 3.53% interest rate.

From the page you reference:
Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.
:oops:

Thanks Will! I knew that, but somehow the :idea: didn’t trigger to recognize that’s what surfstar meant!
In the current bond market, I've been diligently reading up on reasons to purchase EE bonds.
I'm pretty much sold on them. If we purchase the maximum amount annually (20k), in 20 years, the 40k received would cover our annual mortgage and likely all property taxes too. We need to add to our FI/bonds allocation in the coming years and these seem like a good way to go. Have 29 years left on mortgage, plan on early retirement in ~10 years, ages 50/52 ish. A 10 year ladder of EE bonds producing income from 60-70 seems handy. Ensures delaying SS. Yield beats our 3.08% mortgage (INT still deductible for us).

We fully max out our deferred accounts and are about ready to start a taxable. I do prefer the flexibility of a taxable account for future vehicle purchases, etc, vs locking up funds for 20 years. Maybe we'll have to split the difference. Don't quite have the income to do both.

/thread drift!
Downtown1
Posts: 5
Joined: Sat Sep 12, 2020 8:33 pm

Re: Paying off sub 4% mortgage interest rate early

Post by Downtown1 »

FBanks wrote: Fri Sep 11, 2020 2:45 am
*Many people start getting laid off at 50. A big part of our financial plan is to be financially independent (33xretirement expenses) and completely debt free well before that date. Some consider this an emotional decision, but it’s math to me. I never take our high incomes for granted or assume we’ll always have the cashflow to pay at term. High earners at megacorps get laid off all the time and often never recover their high incomes. We want to avoid the financial damage while it’s easy for us to do so. So we make hay while the sun is shining.
Agree with this point about age. While I appreciate my income and job I received advice early on that you have to plan knowing that after 50 if you are let go it is difficult to quickly find a comparable high-level role (if ever). Planning to pay down 2.625 10/1 mortgage In chunks each year at bonus time.

https://www.propublica.org/article/olde ... retirement
User avatar
grabiner
Advisory Board
Posts: 28244
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying off sub 4% mortgage interest rate early

Post by grabiner »

I paid a 2.625% 9-year mortgage (1.78% after state and federal tax) completely off in March and April of this year. However, it wasn't worth even paying down until March; I had been making the minimum payment for six years.

What changed is that interest rates dropped, so that I could earn more on mortgage prepayments than on municipal bonds; and that the stock market fell, so that I could pay off the mortgage without capital gains on stocks. (I actually sold bonds to pay it off; I sold enough stock to pay off the mortgage, and moved an equal amount from bonds to stock in my employer plan. Therefore, regardless of what happened to the stock market, I come out ahead as long as the mortgage rate is higher than the bond yield.)
Wiki David Grabiner
User avatar
willthrill81
Posts: 21419
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Paying off sub 4% mortgage interest rate early

Post by willthrill81 »

Downtown1 wrote: Sat Sep 12, 2020 8:44 pm
FBanks wrote: Fri Sep 11, 2020 2:45 am
*Many people start getting laid off at 50. A big part of our financial plan is to be financially independent (33xretirement expenses) and completely debt free well before that date. Some consider this an emotional decision, but it’s math to me. I never take our high incomes for granted or assume we’ll always have the cashflow to pay at term. High earners at megacorps get laid off all the time and often never recover their high incomes. We want to avoid the financial damage while it’s easy for us to do so. So we make hay while the sun is shining.
Agree with this point about age. While I appreciate my income and job I received advice early on that you have to plan knowing that after 50 if you are let go it is difficult to quickly find a comparable high-level role (if ever). Planning to pay down 2.625 10/1 mortgage In chunks each year at bonus time.

https://www.propublica.org/article/olde ... retirement
Welcome to the forum!

I've often said that those with above median incomes should seek to be financially independent by at least age 60 and preferably by age 55. Planning on barely getting there by 65 or later is fraught with risk (e.g. age discrimination results in a permanently lower income, children or other family members need financial assistance, your own health issues or those of family members necessitate your retiring early).
“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
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
VTSAX and chill
User avatar
billthecat
Posts: 543
Joined: Tue Jan 24, 2017 2:50 pm

Re: Paying off sub 4% mortgage interest rate early

Post by billthecat »

geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
We cannot direct the winds but we can adjust our sails.
MrJedi
Posts: 343
Joined: Wed May 06, 2020 11:42 am

Re: Paying off sub 4% mortgage interest rate early

Post by MrJedi »

billthecat wrote: Sun Sep 13, 2020 12:25 am
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
More reason to pay it down in that case, especially if you hold any low paying bonds/fixed income, as you'll get the cash back out when you sell.
dachshunddad
Posts: 169
Joined: Mon Sep 03, 2018 8:22 pm

Re: Paying off sub 4% mortgage interest rate early

Post by dachshunddad »

I'm not paying it off early. I have a 15 year at 3.25%. That time line is roughly when I will hopefully retire early if I desire. I would personally want my mortgage gone before retirement. For now, I like the liquidity of just investing the extra each month into the stock market. Also, the mortgage is a nice hedge against inflation.
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

billthecat wrote: Sun Sep 13, 2020 12:25 am
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
VTSAX and chill
Jefferson
Posts: 157
Joined: Wed Feb 21, 2018 1:37 pm

Re: Paying off sub 4% mortgage interest rate early

Post by Jefferson »

Yes, very aggressively. We got a 3.25% 30-yr several years ago. Started out paying an extra $1,000/mo. This year, we’re paying an extra $10,000/mo.

It’s not always about math. When your income is highly volatile, becoming debt-free is important!
User avatar
BrandonBogle
Posts: 3329
Joined: Mon Jan 28, 2013 11:19 pm

Re: Paying off sub 4% mortgage interest rate early

Post by BrandonBogle »

dachshunddad wrote: Sun Sep 13, 2020 6:45 am I'm not paying it off early. I have a 15 year at 3.25%. That time line is roughly when I will hopefully retire early if I desire. I would personally want my mortgage gone before retirement. For now, I like the liquidity of just investing the extra each month into the stock market. Also, the mortgage is a nice hedge against inflation.
I would consider taking a look if you can do a no-cost refi to get sub-3%. I was offered 2.25% with $1k back to me after everything last month. Something around 2.5% or so should be doable.
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 13, 2020 9:43 am
billthecat wrote: Sun Sep 13, 2020 12:25 am
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

To lay it out simply.

For most people early in their accumulation phase, liquidity and investing in equities is much more valuable than a paid off mortgage. Keep the mortgage for now but try and refinance.

For those who are towards the end of their accumulation, paying down the mortgage is a great decision.

For those in between should decide based on their own risk profile. And of course a few others will complete disagree and do what they feel is best for them.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 13, 2020 10:23 am
geerhardusvos wrote: Sun Sep 13, 2020 9:43 am
billthecat wrote: Sun Sep 13, 2020 12:25 am
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
VTSAX and chill
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 13, 2020 10:48 am
EnjoyIt wrote: Sun Sep 13, 2020 10:23 am
geerhardusvos wrote: Sun Sep 13, 2020 9:43 am
billthecat wrote: Sun Sep 13, 2020 12:25 am
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am

If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
What if you're within the last couple of years or so, but you intend to sell the home when you retire?
I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
Re rebalancing. We have a nice thread about rebalancing with multiple calculations. It was very informative. Frankly we got lucky with our rebalancing back then.

I completely disagree with your statement regarding paying down a mortgage is a wash. I have so far paid down $150k of my mortgage this year. That cash sitting in bonds would be earning less than 1% while I got a return of 2.75% instead. That is a $2.7k/yr difference and not a wash at all. Today there is no investment that even comes close to a tax free 2.75%/yr guaranteed return with such a short holding period like 2-3 years.

I think if one is looking to sell their home very soon, guaranteeing a return on investments in such a short time frame can be an amazing deal in today’s environment if one has alternate liquidity to take advantage.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
User avatar
grabiner
Advisory Board
Posts: 28244
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying off sub 4% mortgage interest rate early

Post by grabiner »

geerhardusvos wrote: Sun Sep 13, 2020 10:48 am Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.
The math goes the other way; it's more attractive to pay down a mortgage if you are going to sell the home (as long as you don't need the liquidity). The reason is that paying down a mortgage gives a risk-free return, but that return is not realized until the mortgage is paid off. If you have 15 years left on your 3% mortgage, and you make an extra payment, you will have a risk-free 15-year return of 3%, as if you had bought a 15-year bond. If you sell the home in five years, you get the money back then, so you have a 5-year return of 3%. Normally, a long-term bond will have a higher yield than an intermediate-term bond.

Working the other way is the liquidity issue. If you plan to sell your home and buy another one, and you don't have enough liquid cash for the down payment on the new home, you have to either take out a bridge loan against the old home (at a fairly high rate) or make the purchase of the new home contingent on the sale of the old home. Paying down the mortgage on the old home only gives you the liquid cash after you have sold it.
Wiki David Grabiner
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 13, 2020 11:02 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am
EnjoyIt wrote: Sun Sep 13, 2020 10:23 am
geerhardusvos wrote: Sun Sep 13, 2020 9:43 am
billthecat wrote: Sun Sep 13, 2020 12:25 am

What if you're within the last couple of years or so, but you intend to sell the home when you retire?
I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
Re rebalancing. We have a nice thread about rebalancing with multiple calculations. It was very informative. Frankly we got lucky with our rebalancing back then.

I completely disagree with your statement regarding paying down a mortgage is a wash. I have so far paid down $150k of my mortgage this year. That cash sitting in bonds would be earning less than 1% while I got a return of 2.75% instead. That is a $2.7k/yr difference and not a wash at all. Today there is no investment that even comes close to a tax free 2.75%/yr guaranteed return with such a short holding period like 2-3 years.

I think if one is looking to sell their home very soon, guaranteeing a return on investments in such a short time frame can be an amazing deal in today’s environment if one has alternate liquidity to take advantage.
Nisiprius and others have showed pretty compelling arguments that rebalancing has little impact on long term portfolio success.

Your disagreement isn’t looking at the entire picture. There are more variables involved. It totally depends on the market and the house being sold. It only takes accepting an offer that is 1% below the asking price or expected sale price in order to make this a clearly suboptimal approach... it can be a proper wash depending on the scenario. Many people are often already dumping cash into their house in order to get it ready to sell and to pay the associated fees and costs... So they should dump more cash into it? it’s not a simple bond versus mortgage comparison.

Who’s buying bonds right now anyways? :wink:
VTSAX and chill
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

grabiner wrote: Sun Sep 13, 2020 11:10 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.
The math goes the other way; it's more attractive to pay down a mortgage if you are going to sell the home (as long as you don't need the liquidity). The reason is that paying down a mortgage gives a risk-free return, but that return is not realized until the mortgage is paid off. If you have 15 years left on your 3% mortgage, and you make an extra payment, you will have a risk-free 15-year return of 3%, as if you had bought a 15-year bond. If you sell the home in five years, you get the money back then, so you have a 5-year return of 3%. Normally, a long-term bond will have a higher yield than an intermediate-term bond.

Working the other way is the liquidity issue. If you plan to sell your home and buy another one, and you don't have enough liquid cash for the down payment on the new home, you have to either take out a bridge loan against the old home (at a fairly high rate) or make the purchase of the new home contingent on the sale of the old home. Paying down the mortgage on the old home only gives you the liquid cash after you have sold it.
Risk free?

With all due respect, tell that to people who bought a house in 1979, 1989, or 2006...

I think the approach you are laying out above works in some (most?) cases, but there are a lot of variables... markets are diverse and individual properties within those markets can vary very widely. And it totally depends on when the property was purchased and how long the property is held for, and if the property has been maintained. So many variables.
VTSAX and chill
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 13, 2020 11:11 am
EnjoyIt wrote: Sun Sep 13, 2020 11:02 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am
EnjoyIt wrote: Sun Sep 13, 2020 10:23 am
geerhardusvos wrote: Sun Sep 13, 2020 9:43 am

I disagree with Jedi above. There’s no reason to pay off the mortgage if you plan to sell the house. Don’t underestimate the costs of getting the house ready to sell, especially if you have neglected some of the maintenance or cosmetic items. Just keep investing and the sale of the home will pay off your mortgage. No need to dump more money into an asset that’s not paying you, and the interest rate is negligible especially for a two to three-year timeline
Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
Re rebalancing. We have a nice thread about rebalancing with multiple calculations. It was very informative. Frankly we got lucky with our rebalancing back then.

I completely disagree with your statement regarding paying down a mortgage is a wash. I have so far paid down $150k of my mortgage this year. That cash sitting in bonds would be earning less than 1% while I got a return of 2.75% instead. That is a $2.7k/yr difference and not a wash at all. Today there is no investment that even comes close to a tax free 2.75%/yr guaranteed return with such a short holding period like 2-3 years.

I think if one is looking to sell their home very soon, guaranteeing a return on investments in such a short time frame can be an amazing deal in today’s environment if one has alternate liquidity to take advantage.
Nisiprius and others have showed pretty compelling arguments that rebalancing has little impact on long term portfolio success.

Your disagreement isn’t looking at the entire picture. There are more variables involved. It totally depends on the market and the house being sold. It only takes accepting an offer that is 1% below the asking price or expected sale price in order to make this a clearly suboptimal approach... it can be a proper wash depending on the scenario. Many people are often already dumping cash into their house in order to get it ready to sell and to pay the associated fees and costs... So they should dump more cash into it? it’s not a simple bond versus mortgage comparison.

Who’s buying bonds right now anyways? :wink:
I agree with the rebalancing discussion so let’s stop here.

The sale price of the house is irrelevant.
Example:
I have a $400k house where I owe $200k at 3% and I have $100k which I can invest in 1% bonds or put it towards the mortgage. After two years I sell the house for $360k for a 10% loss.

If I pay off the mortgage with the additional $100k over those two years I will get an after tax return of $6k. I still sell the house and come out with $360k sale price minus remaining mortgage of about $100k plus the interest I did not pay on that $100k payment. I’m left with $360k - $100k + $6k = $266k

If I invest that money into 1% bonds I will get $2k of which I may have to pay taxes. Same thing, I sell the house for $360k minus the remaining balance of about $200k plus the $100k in the bond fund plus its interest. $360k - $200k +$100k +$2k = $262k

As you can see the sale price makes no difference in this calculation. I also ignored mortgage payments over the 2 years to make the math a little simpler but willing to add that in if it proves to you that the sale price does not matter.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 13, 2020 11:15 am
grabiner wrote: Sun Sep 13, 2020 11:10 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.
The math goes the other way; it's more attractive to pay down a mortgage if you are going to sell the home (as long as you don't need the liquidity). The reason is that paying down a mortgage gives a risk-free return, but that return is not realized until the mortgage is paid off. If you have 15 years left on your 3% mortgage, and you make an extra payment, you will have a risk-free 15-year return of 3%, as if you had bought a 15-year bond. If you sell the home in five years, you get the money back then, so you have a 5-year return of 3%. Normally, a long-term bond will have a higher yield than an intermediate-term bond.

Working the other way is the liquidity issue. If you plan to sell your home and buy another one, and you don't have enough liquid cash for the down payment on the new home, you have to either take out a bridge loan against the old home (at a fairly high rate) or make the purchase of the new home contingent on the sale of the old home. Paying down the mortgage on the old home only gives you the liquid cash after you have sold it.
Risk free?

With all due respect, tell that to people who bought a house in 1979, 1989, or 2006...

I think the approach you are laying out above works in some (most?) cases, but there are a lot of variables... markets are diverse and individual properties within those markets can vary very widely. And it totally depends on when the property was purchased and how long the property is held for, and if the property has been maintained. So many variables.
Unless the plan is to let the bank take your house, you must pay the debt. This is why it is risk free. Sure there may be some rare circumstances where there is risk such as your houses gets flooded and you don’t have flood insurance therefor walking away may be the beat option. It could happen, but we have flood insurance.

At the end of the day you have a debt to pay which is irrespective of the value of the collateral you used to secure that loan.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 13, 2020 11:29 am
geerhardusvos wrote: Sun Sep 13, 2020 11:11 am
EnjoyIt wrote: Sun Sep 13, 2020 11:02 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am
EnjoyIt wrote: Sun Sep 13, 2020 10:23 am

Hold on. Here is our scenario. We have cash to fix up the house and make it sale worthy and planning to sell our home in a few years. We run a 70/30 portfolio. Due to the run up in the market recently after a rebalance in March, all new contributions in taxable that should go to bonds to keep said AA are being diverted towards our 2.75% mortgage. the return is much higher and guaranteed compared to bonds. I’ll get the cash back when I sell. I’m letting our AA slide out of wack for a little until mortgage is paid off which will hopefully happens in the next 6-10 months maybe sooner.
Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
Re rebalancing. We have a nice thread about rebalancing with multiple calculations. It was very informative. Frankly we got lucky with our rebalancing back then.

I completely disagree with your statement regarding paying down a mortgage is a wash. I have so far paid down $150k of my mortgage this year. That cash sitting in bonds would be earning less than 1% while I got a return of 2.75% instead. That is a $2.7k/yr difference and not a wash at all. Today there is no investment that even comes close to a tax free 2.75%/yr guaranteed return with such a short holding period like 2-3 years.

I think if one is looking to sell their home very soon, guaranteeing a return on investments in such a short time frame can be an amazing deal in today’s environment if one has alternate liquidity to take advantage.
Nisiprius and others have showed pretty compelling arguments that rebalancing has little impact on long term portfolio success.

Your disagreement isn’t looking at the entire picture. There are more variables involved. It totally depends on the market and the house being sold. It only takes accepting an offer that is 1% below the asking price or expected sale price in order to make this a clearly suboptimal approach... it can be a proper wash depending on the scenario. Many people are often already dumping cash into their house in order to get it ready to sell and to pay the associated fees and costs... So they should dump more cash into it? it’s not a simple bond versus mortgage comparison.

Who’s buying bonds right now anyways? :wink:
I agree with the rebalancing discussion so let’s stop here.

The sale price of the house is irrelevant.
Example:
I have a $400k house where I owe $200k at 3% and I have $100k which I can invest in 1% bonds or put it towards the mortgage. After two years I sell the house for $360k for a 10% loss.

If I pay off the mortgage with the additional $100k over those two years I will get an after tax return of $6k. I still sell the house and come out with $360k sale price minus remaining mortgage of about $100k plus the interest I did not pay on that $100k payment. I’m left with $360k - $100k + $6k = $266k

If I invest that money into 1% bonds I will get $2k of which I may have to pay taxes. Same thing, I sell the house for $360k minus the remaining balance of about $200k plus the $100k in the bond fund plus its interest. $360k - $200k +$100k +$2k = $262k

As you can see the sale price makes no difference in this calculation. I also ignored mortgage payments over the 2 years to make the math a little simpler but willing to add that in if it proves to you that the sale price does not matter.
This is analysis on your individual property. It’s not a slam dunk in other cases.

What happens when the sale of the house is less than or not much greater than the purchase price? This was/is the reality for millions of Americans who purchased in 1979, 1989, and 2006. In most markets it took 10 years to get back to the initial purchase price from those years. Let alone keep up with inflation. In those cases, borrowing 2%-6% for those houses turned out to be worse than bonds. Well worse in some cases.
VTSAX and chill
JBTX
Posts: 7114
Joined: Wed Jul 26, 2017 12:46 pm

Re: Paying off sub 4% mortgage interest rate early

Post by JBTX »

Refinancing 3.25% to 2.375% 15 year modest sized mortgage.
User avatar
geerhardusvos
Posts: 1288
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Paying off sub 4% mortgage interest rate early

Post by geerhardusvos »

EnjoyIt wrote: Sun Sep 13, 2020 11:31 am Unless the plan is to let the bank take your house, you must pay the debt. This is why it is risk free. Sure there may be some rare circumstances where there is risk such as your houses gets flooded and you don’t have flood insurance therefor walking away may be the beat option. It could happen, but we have flood insurance.

At the end of the day you have a debt to pay which is irrespective of the value of the collateral you used to secure that loan.
I don’t think you understand the scope. You are zeroed in on your own property. How many millions of Americans have been “underwater“ on their house for an extended period of time over the last 50 years? People have had to sell during those times of being underwater. including retirees who wanted to move to a different area. The value of the home has everything to do with whether borrowing the money to get that home was worth it. Economic cost is being ignored in your analysis. Holding the property after it’s paid off and living in it is another way to reduce this risk.

Depending on where you live, the risk of losing your house isn’t so rare. There are thousands and thousands of homes being burnt down right now in Oregon and California. Hurricanes are extremely real. Floods all over the nation each year. Wouldn’t be fun to roll the dice with those home insurance companies! It’s a reality depending on where you live.
VTSAX and chill
EnjoyIt
Posts: 4968
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off sub 4% mortgage interest rate early

Post by EnjoyIt »

geerhardusvos wrote: Sun Sep 13, 2020 11:37 am
EnjoyIt wrote: Sun Sep 13, 2020 11:29 am
geerhardusvos wrote: Sun Sep 13, 2020 11:11 am
EnjoyIt wrote: Sun Sep 13, 2020 11:02 am
geerhardusvos wrote: Sun Sep 13, 2020 10:48 am

Like I said above, pay off the mortgage when you are close to retirement if you plan on staying in the house. A paid off house and retirement is a pretty sweet deal. If you plan on selling the house, it is a wash. If you would rather pay down the mortgage ahead of sale, go for it. Personally, if I was planning to sell a house at any point, I would never pay it off aggressively, even close to retirement and even in the current interest-rate market.

FYI, rebalancing is overrated
Re rebalancing. We have a nice thread about rebalancing with multiple calculations. It was very informative. Frankly we got lucky with our rebalancing back then.

I completely disagree with your statement regarding paying down a mortgage is a wash. I have so far paid down $150k of my mortgage this year. That cash sitting in bonds would be earning less than 1% while I got a return of 2.75% instead. That is a $2.7k/yr difference and not a wash at all. Today there is no investment that even comes close to a tax free 2.75%/yr guaranteed return with such a short holding period like 2-3 years.

I think if one is looking to sell their home very soon, guaranteeing a return on investments in such a short time frame can be an amazing deal in today’s environment if one has alternate liquidity to take advantage.
Nisiprius and others have showed pretty compelling arguments that rebalancing has little impact on long term portfolio success.

Your disagreement isn’t looking at the entire picture. There are more variables involved. It totally depends on the market and the house being sold. It only takes accepting an offer that is 1% below the asking price or expected sale price in order to make this a clearly suboptimal approach... it can be a proper wash depending on the scenario. Many people are often already dumping cash into their house in order to get it ready to sell and to pay the associated fees and costs... So they should dump more cash into it? it’s not a simple bond versus mortgage comparison.

Who’s buying bonds right now anyways? :wink:
I agree with the rebalancing discussion so let’s stop here.

The sale price of the house is irrelevant.
Example:
I have a $400k house where I owe $200k at 3% and I have $100k which I can invest in 1% bonds or put it towards the mortgage. After two years I sell the house for $360k for a 10% loss.

If I pay off the mortgage with the additional $100k over those two years I will get an after tax return of $6k. I still sell the house and come out with $360k sale price minus remaining mortgage of about $100k plus the interest I did not pay on that $100k payment. I’m left with $360k - $100k + $6k = $266k

If I invest that money into 1% bonds I will get $2k of which I may have to pay taxes. Same thing, I sell the house for $360k minus the remaining balance of about $200k plus the $100k in the bond fund plus its interest. $360k - $200k +$100k +$2k = $262k

As you can see the sale price makes no difference in this calculation. I also ignored mortgage payments over the 2 years to make the math a little simpler but willing to add that in if it proves to you that the sale price does not matter.
This is analysis on your individual property. It’s not a slam dunk in other cases.

What happens when the sale of the house is less than or not much greater than the purchase price? This was/is the reality for millions of Americans who purchased in 1979, 1989, and 2006. In most markets it took 10 years to get back to the initial purchase price from those years. Let alone keep up with inflation. In those cases, borrowing 2%-6% for those houses turned out to be worse than bonds. Well worse in some cases.
Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
Post Reply