Another Mortgage Payoff Post

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PizzaGrease
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Another Mortgage Payoff Post

Post by PizzaGrease »

I am in a situation where I'm able to lump-sum pay off my 15yr mortgage 2.75% with a balance of ~$75k, I'm 4 years into the mortgage. I have a couple of different options that I can think of and I'm weighing the best way to proceed.

Option 1 - Pay off mortgage with a lump sum, saving $11000 in future interest payments. Take the monthly mortgage payment amount (P&I) of $702 and investing (CD, mutual fund etc). Assuming 10% interest compounded monthly. In 11 years:
End balance $167,680.07
Total contributions $92,664.00
Total interest earned $75,016.07

Option 2 - Keep the mortgage, make the minimal monthly payment $1100. Invest $563 addition principal payment in a CD etc. When that investment account balance (plus a bit more to cover taxes) equals the mortgage balance, pay off the mortgage. This takes about 4.75 years to accumulate a balance to pay off the mortgage. $2943 interest is saved.

Option 3 - Do nothing (not an option).

Option 4 (added later) Keep the mortgage, invest the $75k and add $500/month to investment.
End balance $343,718.05
Initial deposit $75,000.00
Total contributions $66,000.00
Total interest earned $202,718.05

Other options that I'm missing or reasons that I shouldn't pay it off?

Thanks,
Last edited by PizzaGrease on Sun Oct 13, 2024 12:53 pm, edited 2 times in total.
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retiredjg
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Re: Another Mortgage Payoff Post

Post by retiredjg »

Welcome to the forum. :happy

You will get various opinions on this and I'm convinced there is no "right" answer for all situations...I think this is a personal preference decision.

I am in a similar situation and have decided to keep the mortgage for the same reason I took the mortgage in the first place. It's cheap money and my investments are expected to make more than 2.75% (even after taxes).

Some people just don't like debt and would pay it off. For the most part, these people are also happy with their decision.
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Watty
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Re: Another Mortgage Payoff Post

Post by Watty »

PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Other options that I'm missing...
You could just put the money into a 1 year CD then decide what to do next year when the decision might be more obvious.

You can figure out what the payoff amount will be next year($65K ish ????) and put that into a CD but I did not want to do the math.
Outer Marker
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Re: Another Mortgage Payoff Post

Post by Outer Marker »

I would not do anything to accelerate payments on a 2.75% mortgage. Just make the monthly payments on schedule and invest the surplus according to your long term asset allocation.
hafjell
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Re: Another Mortgage Payoff Post

Post by hafjell »

You can "play the carry" by investing the payoff funds into any vehicle over the 2.75% so it's not a financial question. The numbers say, take the carry trade https://www.investopedia.com/carry-trad ... on-4682656. But what you're asking is, do I want to cede the interest profits on treasuries (call it 4.75% v. 2.75% on your mortgage) to own the home outright? Tough call. I envy your difficult choice. I'd play the carry, but the conservative decision is often the better one--sometimes for reasons we don't understand at the time we make them.
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PizzaGrease
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Re: Another Mortgage Payoff Post

Post by PizzaGrease »

retiredjg wrote: Sun Oct 13, 2024 10:40 am Welcome to the forum. :happy

You will get various opinions on this and I'm convinced there is no "right" answer for all situations...I think this is a personal preference decision.

I am in a similar situation and have decided to keep the mortgage for the same reason I took the mortgage in the first place. It's cheap money and my investments are expected to make more than 2.75% (even after taxes).

Some people just don't like debt and would pay it off. For the most part, these people are also happy with their decision.
Thanks for the input. I'd been reading multiple threads here and came across this one below, the OP asked if anyone that had paid off the mortgage early had regrets.
viewtopic.php?t=97467

For the most part of the 50 some pages, only a handful wish they hadn't paid off early. I do understand the equity not being liquid, I get that part. But it seems like longer term (10 years out) I'd come out a head paying off and investing the amount of my P&I (Option 1). I'd be paying ~$11k less in interest and freeing up ~ 700 $/month to invest.

After staring at that last sentence for several minutes, I thought of another option.

I've updated my initial post to include Option 4.
blortchplop
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Re: Another Mortgage Payoff Post

Post by blortchplop »

EDIT: Typed this while you wrote your last post. This advocates for option 4. Otherwise leaving as-is.

I think the answer to this will depend primarily upon what your goals are and how close you are to reaching them.

How far are you from retirement?
How much do you have saved, and in what vehicles?
Are you meeting your savings goals?
Are the mortgage payments causing significant cashflow issues?
Would paying off the mortgage offer specific benefits such as reduced living expenses in preparation for retirement or a job change?
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am I am in a situation where I'm able to lump-sum pay off my 15yr mortgage 2.75% with a balance of ~$75k, I'm 4 years into the mortgage. I have a couple of different options that I can think of and I'm weighing the best way to proceed.

Option 1 - Pay off mortgage with a lump sum, saving $11000 in future interest payments. Take the monthly mortgage payment amount (P&I) of $702 and investing (CD, mutual fund etc). Assuming 10% interest compounded monthly. In 11 years:
End balance $167,680.07
Total contributions $92,664.00
Total interest earned $75,016.07
A few things on this one
  • Referring to the bolded text, you're not going to get 10% from a CD, mutual fund, or bonds. Perhaps you are thinking to invest in equities?
  • If you invested the $75k today at 10% compounded monthly, you'd have $224,287.81 in 11 years.
  • The biggest downside to paying off a mortgage is reduced liquidity. If you pay off the mortgage, the only ways to access that money involve taking out another loan on your house. If you leave that $75k invested, you can pull it out of the investment if needed due to an emergency or unforseen large expense. Granted, this may come at a cost: Selling at an inopportune time, taxes, penalties if withdrawing from a tax advantaged account, etc.
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Option 2 - Keep the mortgage, make the minimal monthly payment $1100. Invest $563 addition principal payment in a CD etc. When that investment account balance (plus a bit more to cover taxes) equals the mortgage balance, pay off the mortgage. This takes about 4.75 years to accumulate a balance to pay off the mortgage. $2943 interest is saved.
This is sensible, although you're more likely to get better returns by investing this extra cashflow in tax advantaged accounts and at least some proportion of equities. What would you do with the $75k in this scenario?

If the after-tax interest on CDs or similar instruments drops below 2.75% in the future, then making extra payments to the mortgage directly would make sense.
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Option 3 - Do nothing (not an option).
What exactly do you mean by nothing?
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Other options that I'm missing or reasons that I shouldn't pay it off?

Thanks,
Use the $75k to get your emergency fund where you want it (if it's not already where you want it), invest the rest of the $75k and any additional ongoing cashflow according to your AA / investment plan, and continue to pay the mortgage at the original rate.

With this plan, you'd have more cash liquid and accessible in case of an emergency (although think about taxes / penalties), you'd be more likely to achieve a higher rate of return, and you would be able to pay off the house if that became a necessity for any reason (2008 style crash?).

If you still really want to pay it off for peace of mind, just consider the opportunity cost. It might not be possible to put a dollar figure on the personal appeal of owning your own home outright.

I paid off my 20-year 3.5% fixed rate mortgage in 7 years because I hadn't read up on financial stuff and just wanted to see the amount owed on principal go down. While I do enjoy having the house paid off, I would be in a better position right now had I put the extra money into my emergency fund and retirement accounts rather than sinking it all into the mortgage. I'm doing my best to make up for that now by saving as much as I can, within reason.
hafjell
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Re: Another Mortgage Payoff Post

Post by hafjell »

@blortchplop this is a terrific post. Thank you.
Topic Author
PizzaGrease
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Re: Another Mortgage Payoff Post

Post by PizzaGrease »

Outer Marker wrote: Sun Oct 13, 2024 12:04 pm I would not do anything to accelerate payments on a 2.75% mortgage. Just make the monthly payments on schedule and invest the surplus according to your long term asset allocation.
Agree with you on this one. Starting last year, I began making additional principal payments. After seeing that there's not a huge benefit, I'm stopping and making the minimum payment (PITI).
Last edited by PizzaGrease on Sun Oct 13, 2024 1:48 pm, edited 1 time in total.
Topic Author
PizzaGrease
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Re: Another Mortgage Payoff Post

Post by PizzaGrease »

blortchplop wrote: Sun Oct 13, 2024 12:46 pm EDIT: Typed this while you wrote your last post. This advocates for option 4. Otherwise leaving as-is.

I think the answer to this will depend primarily upon what your goals are and how close you are to reaching them.

How far are you from retirement?
How much do you have saved, and in what vehicles?
Are you meeting your savings goals?
Are the mortgage payments causing significant cashflow issues?
Would paying off the mortgage offer specific benefits such as reduced living expenses in preparation for retirement or a job change?
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am I am in a situation where I'm able to lump-sum pay off my 15yr mortgage 2.75% with a balance of ~$75k, I'm 4 years into the mortgage. I have a couple of different options that I can think of and I'm weighing the best way to proceed.

Option 1 - Pay off mortgage with a lump sum, saving $11000 in future interest payments. Take the monthly mortgage payment amount (P&I) of $702 and investing (CD, mutual fund etc). Assuming 10% interest compounded monthly. In 11 years:
End balance $167,680.07
Total contributions $92,664.00
Total interest earned $75,016.07
A few things on this one
  • Referring to the bolded text, you're not going to get 10% from a CD, mutual fund, or bonds. Perhaps you are thinking to invest in equities?
  • If you invested the $75k today at 10% compounded monthly, you'd have $224,287.81 in 11 years.
  • The biggest downside to paying off a mortgage is reduced liquidity. If you pay off the mortgage, the only ways to access that money involve taking out another loan on your house. If you leave that $75k invested, you can pull it out of the investment if needed due to an emergency or unforseen large expense. Granted, this may come at a cost: Selling at an inopportune time, taxes, penalties if withdrawing from a tax advantaged account, etc.
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Option 2 - Keep the mortgage, make the minimal monthly payment $1100. Invest $563 addition principal payment in a CD etc. When that investment account balance (plus a bit more to cover taxes) equals the mortgage balance, pay off the mortgage. This takes about 4.75 years to accumulate a balance to pay off the mortgage. $2943 interest is saved.
This is sensible, although you're more likely to get better returns by investing this extra cashflow in tax advantaged accounts and at least some proportion of equities. What would you do with the $75k in this scenario?

If the after-tax interest on CDs or similar instruments drops below 2.75% in the future, then making extra payments to the mortgage directly would make sense.
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Option 3 - Do nothing (not an option).
What exactly do you mean by nothing?
PizzaGrease wrote: Sun Oct 13, 2024 9:20 am Other options that I'm missing or reasons that I shouldn't pay it off?

Thanks,
Use the $75k to get your emergency fund where you want it (if it's not already where you want it), invest the rest of the $75k and any additional ongoing cashflow according to your AA / investment plan, and continue to pay the mortgage at the original rate.

With this plan, you'd have more cash liquid and accessible in case of an emergency (although think about taxes / penalties), you'd be more likely to achieve a higher rate of return, and you would be able to pay off the house if that became a necessity for any reason (2008 style crash?).

If you still really want to pay it off for peace of mind, just consider the opportunity cost. It might not be possible to put a dollar figure on the personal appeal of owning your own home outright.

I paid off my 20-year 3.5% fixed rate mortgage in 7 years because I hadn't read up on financial stuff and just wanted to see the amount owed on principal go down. While I do enjoy having the house paid off, I would be in a better position right now had I put the extra money into my emergency fund and retirement accounts rather than sinking it all into the mortgage. I'm doing my best to make up for that now by saving as much as I can, within reason.
Thanks for the input. While I had written down Option 4 in my notebook, I didn't run the numbers. I thought that I had, but I had overlooked it. Reviewing all the options, I think that Option 4 is probably the better from a numbers perspective. I already have sleep issues, having or not having a mortgage payment is in the noise floor ha.
Last edited by PizzaGrease on Sun Oct 13, 2024 1:49 pm, edited 1 time in total.
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Re: Another Mortgage Payoff Post

Post by Outer Marker »

PizzaGrease wrote: Sun Oct 13, 2024 12:55 pm
Outer Marker wrote: Sun Oct 13, 2024 12:04 pm I would not do anything to accelerate payments on a 2.75% mortgage. Just make the monthly payments on schedule and invest the surplus according to your long term asset allocation.
Agree with you on this one. Staring last year, I began making additional principal payments. After seeing that there's not a huge benefit, I'm stopping and making the minimum payment (PITI).
You're ahead of the game compared to most by having a 15 year term instead of a 30. This gives you a much bigger shovel in attacking the principle. No need to do more. I'm also on a very low 2.125% 15 year term. While I've generally been a "pay off the mortgage" guy - at those favorable rates it just doesn't make sense. If I were paying 6% at today's rates, it would be a whole different story.
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Re: Another Mortgage Payoff Post

Post by wangle »

Which choice would spark joy? :D
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retiredjg
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Re: Another Mortgage Payoff Post

Post by retiredjg »

PizzaGrease wrote: Sun Oct 13, 2024 12:41 pm But it seems like longer term (10 years out) I'd come out a head paying off and investing the amount of my P&I (Option 1). I'd be paying ~$11k less in interest and freeing up ~ 700 $/month to invest.
But the cost of doing that is taking the $75k out of your portfolio. That eliminates forever all the income the $75k would earn. I'm not so sure that is a way to come out ahead.

With a low rate mortgage, there is no financial incentive to pay it off early. But you may have other reasons you want to pay it off.
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PizzaGrease
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Re: Another Mortgage Payoff Post

Post by PizzaGrease »

blortchplop wrote: Sun Oct 13, 2024 12:46 pm EDIT: Typed this while you wrote your last post. This advocates for option 4. Otherwise leaving as-is.
I think the answer to this will depend primarily upon what your goals are and how close you are to reaching them.
How far are you from retirement?
Approximately 9 more years.

blortchplop wrote: Sun Oct 13, 2024 12:46 pm How much do you have saved, and in what vehicles?
For retirement my wife and I have about $250k in ROTH IRAs. I've done terribly in saving for retirement and I'm playing catch up. I'll be working as long as I can 1) Because I have to, ha. 2) Because I'll lose my mind if I'm not working.

The majority of my career (mechanical engineer) has been with small companies that didn't have any or much of a retirement plan. It was on me. I didn't have the discipline to keep investing once I opened IRAs. Once married and having kids/family, current expenses typically trumped saving. I basically had difficulty seeing the forest through the trees.

blortchplop wrote: Sun Oct 13, 2024 12:46 pm Are you meeting your savings goals?
I am now. My current employer has a very good 401k matching, the best I've ever heard of. Last night I did a rough calc. I'm putting in 10% toward a ROTH 401k. A simple calc of my contribution/employer contribution = .56%

blortchplop wrote: Sun Oct 13, 2024 12:46 pm Are the mortgage payments causing significant cashflow issues?
Would paying off the mortgage offer specific benefits such as reduced living expenses in preparation for retirement or a job change?
Sometimes, yes. But in general no. Paying off the mortgage would produce an additional $700/month. I'll still be on the hook of course for taxes and insurance, so it's not like the whole mortgage payment would be going away. Just the P&I.

blortchplop wrote: Sun Oct 13, 2024 12:46 pm A few things on this one
  • Referring to the bolded text, you're not going to get 10% from a CD, mutual fund, or bonds. Perhaps you are thinking to invest in equities?
  • If you invested the $75k today at 10% compounded monthly, you'd have $224,287.81 in 11 years.
  • The biggest downside to paying off a mortgage is reduced liquidity. If you pay off the mortgage, the only ways to access that money involve taking out another loan on your house. If you leave that $75k invested, you can pull it out of the investment if needed due to an emergency or unforseen large expense. Granted, this may come at a cost: Selling at an inopportune time, taxes, penalties if withdrawing from a tax advantaged account, etc.
Yes, equities, I was just lumping all the investment types into one. This list you've put together was what was racing through my mind as I was looking at my last sentence when it hit me, I hadn't included the Option 4. DOH! So I ran those numbers for that scenario and added the results to my OP.

blortchplop wrote: Sun Oct 13, 2024 12:46 pm This is sensible, although you're more likely to get better returns by investing this extra cashflow in tax advantaged accounts and at least some proportion of equities. What would you do with the $75k in this scenario?

If the after-tax interest on CDs or similar instruments drops below 2.75% in the future, then making extra payments to the mortgage directly would make sense.
Just that. Do nothing and make no changes. While that is an option, it's not an actionable option if that makes sense. I tend to list all options even if it's not a viable one.
Topic Author
PizzaGrease
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Re: Another Mortgage Payoff Post

Post by PizzaGrease »

Outer Marker wrote: Sun Oct 13, 2024 1:08 pm
PizzaGrease wrote: Sun Oct 13, 2024 12:55 pm

Agree with you on this one. Staring last year, I began making additional principal payments. After seeing that there's not a huge benefit, I'm stopping and making the minimum payment (PITI).
You're ahead of the game compared to most by having a 15 year term instead of a 30. This gives you a much bigger shovel in attacking the principle. No need to do more. I'm also on a very low 2.125% 15 year term. While I've generally been a "pay off the mortgage" guy - at those favorable rates it just doesn't make sense. If I were paying 6% at today's rates, it would be a whole different story.
Thanks. When rates dropped right before covid hit, I refi'd my 4%-5% 30yr mortgage for a 2.75% 15yr. There was a narrow window when rates went really low again and I was fortunate enough to have acted quickly on that one.

When I had my 30yr mortgage I would make additional payments when I could. Looking at the amortization table and seeing the principle amount was painful. Just a small fraction of the payment. With the 15yr mortgage, looking at the amortization table for that loan, I really began questioning the value of paying it off early.
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Re: Another Mortgage Payoff Post

Post by grabiner »

The current yield on Vanguard Intermediate-Term Tax-Exempt Admiral shares is 3.21%. This fund has a duration of 5.6 years, which is close to the current duration of a full payoff of an 11-year loan. Thus, if you invest in this fund instead of paying off your mortgage, you will earn more interest than you pay, without taking on significant risk. And you retain the option of paying it off later or not; if muni rates fall next year, you can sell the munis for a gain, and then pay off the mortgage.

You don't have to invest in this specific fund, but it is the fund that gives the closest to a fair comparison. If buying munis is better than paying off the mortgage, you could instead buy stock in your taxable account and bonds in your 401(k), which is likely to give a better after-tax return.

I used the same logic in paying off my mortgage, which was 2.625% and fully deductible, so it was only 1.78% after tax. For years, it made no sense to pay off a loan at such a low rate, as I could earn more on bonds. But in 2020, Vanguard Intermediate-Term Tax-Exempt Admiral had about the same duration as my mortgage payoff, and a yield of 1.24% which was 1.14% after state tax, so I paid it off then. I don't hold that muni fund; I actually sold stock in my taxable account for a capital loss to pay off the mortgage, and sold bonds in my employer plan to buy stock, so I kept my stock exposure.
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