To pay or not to pay off mortgage?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
ScreamyMeMe
Posts: 4
Joined: Fri Aug 05, 2016 5:17 pm

To pay or not to pay off mortgage?

Post by ScreamyMeMe » Fri Aug 05, 2016 5:41 pm

Ok... I'm in the process of liquidating my managed brokerage account and moving into Vanguard (been considering for a while and finishing JL Collins A Simple Path to Wealth sealed the deal) and am torn on whether to take the opportunity to pay off the abode.

43, married, 2 kids
Annual income: $180-220k
Brokerage Proceeds: $653k
IRAs: $160k
401k: $510K
529: $128k
Cash: $40k
Other Liquid Assets: $110k

Mortgage: $213k on $590k property with favorable financing terms (30 yr at 3.625%)


So... thoughts on paying off the loan for piece of mind or invesing the funds and ride favorable mortgage terms?

joebh
Posts: 1708
Joined: Mon Mar 02, 2015 3:45 pm

Re: To pay or not to pay off mortgage?

Post by joebh » Fri Aug 05, 2016 6:50 pm

There are plenty of other threads discussing the merits of paying off inexpensive mortgages, or not.

Do you think your investments would return more than 3.625% (potentially discounted due to tax deductions) over the long run?
Has the thought of having a mortgage kept you up at night over the years?

For some people, the thought of having no mortgage is worth the loss of investment returns.
For others, not so much.

ScreamyMeMe
Posts: 4
Joined: Fri Aug 05, 2016 5:17 pm

Re: To pay or not to pay off mortgage?

Post by ScreamyMeMe » Fri Aug 05, 2016 6:58 pm

joebh wrote:There are plenty of other threads discussing the merits of paying off inexpensive mortgages, or not.

Do you think your investments would return more than 3.625% (potentially discounted due to tax deductions) over the long run?
Has the thought of having a mortgage kept you up at night over the years?

For some people, the thought of having no mortgage is worth the loss of investment returns.
For others, not so much.



Thanks joebh for the quick response. I will check into the other threads. I'm not concerned about the mortgage, but there is something empowering to actually be debt free. I suspect I could do marginally better by investing the amount, but was just seeking different opinions and perspectives.

Stonebr
Posts: 1430
Joined: Wed Jan 21, 2009 11:19 am
Location: Maine

Re: To pay or not to pay off mortgage?

Post by Stonebr » Fri Aug 05, 2016 7:04 pm

What you call "empowering" about not having debt is a very real feeling for me too. I've been debt-free for about 17 years. I sold stock in 1999, paid off the mortgage and never looked back.

I feel so sorry for young people nowadays, locked into a lifetime of debt-slavery. It's a national disgrace.

Pay it off and don't look back. Freedom is priceless.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

User avatar
Watty
Posts: 11608
Joined: Wed Oct 10, 2007 3:55 pm

Re: To pay or not to pay off mortgage?

Post by Watty » Fri Aug 05, 2016 7:06 pm

There is a wiki on this but not a one size fits all right choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

A couple of things to consider.

1) Investing the money and getting a higher return is harder than it sounds. If you would be investing the money with an asset allocation of anywhere near the old saying of "your age in bonds" then you would be putting about 40% of the $213K, or $85K, of the money into bond that are earning a lower interest rate than the mortgage. Even with possible tax advantages that makes it kinda hard to come out ahead much less hit a grans slam.

2) You would have a large sequence of returns risk if you keep the mortgage so if you get unlucky and the investments do badly the next few years then you will have a hard time coming out ahead. I have posted this example before.

 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

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


3) Using leverage for investing adds risk and you don't have any apparent need to take additional risk.

In your situation I would just pay it off then invest your "mortgage payment" each month.

inbox788
Posts: 4142
Joined: Thu Mar 15, 2012 5:24 pm

Re: To pay or not to pay off mortgage?

Post by inbox788 » Fri Aug 05, 2016 7:06 pm

Just keep doing what you're doing. You have 60%+ equity in the home. Some people with 20% equity invest more, others with 100% equity (home paid off) don't. You could borrow (refinance cash out) to be more like the former or pay off like the latter. You're already splitting the difference.

Younger folk invest more, which his a good thing, and as you pay off the mortgage, you're investing proportionally less, which is less risky and that's a good thing. So actually paying off a mortgage is an automatic self-adjusting risk reduction method and you're right in the middle of it.

Alternatively, one less conventional plan is to use the bond portion of your investments and pay off your mortgage with that AA, in effect decreasing the bond AA. This is half treating the mortgage as a negative bond, ignoring the liability portion when figuring out the desired AA. Some people who try to use the mortgage as a negative bond and include that in the AA require buying too many bonds, they start very late in equities.

In any case, it won't make a big difference either way whatever you choose, so don't worry about it.

delamer
Posts: 3128
Joined: Tue Feb 08, 2011 6:13 pm

Re: To pay or not to pay off mortgage?

Post by delamer » Fri Aug 05, 2016 7:29 pm

Paying it off is reasonable.

A middle-of-the-road alternative would be to refinance into a 10-year or 15-year loan at about 2.75%, which is effectively about 2.0% if you are in the 25% bracket and itemizing.

CppCoder
Posts: 548
Joined: Sat Jan 23, 2016 9:16 pm

Re: To pay or not to pay off mortgage?

Post by CppCoder » Fri Aug 05, 2016 7:31 pm

You didn't say how long you still have left on the 30 year note. I'd guess that with your interest rate, you have a lot of it left. A middle ground might be to refinance to a 15 or 10 year mortgage. Lately, people are posting rates between 2.5% and 2.875%. Since you can afford to pay the whole thing cash, you clearly can handle the higher monthly payment. The shorter term will allow you to save considerably on overall interest, save on interest rate, retain higher liquidity, and still have a reasonably short payoff period (done before retirement).

You'll have to run the numbers yourself, but you should also keep an eye on what this might do to your taxes. Obviously, the mortgage deduction makes the effective mortgage rate lower, but you are in an interesting income bracket. If you are married filing jointly, the tax brackets are

25%: $75,300 to $151,900
28%: $151,900 to $231,450

Depending on where you are in the range of income you provided and your current deductions, the loss of the mortgage interest deduction could jump your bracket on your marginal dollars.

Edit: delamer beat me to it while I was writing...

ScreamyMeMe
Posts: 4
Joined: Fri Aug 05, 2016 5:17 pm

Re: To pay or not to pay off mortgage?

Post by ScreamyMeMe » Fri Aug 05, 2016 8:26 pm

CppCoder wrote:You didn't say how long you still have left on the 30 year note. I'd guess that with your interest rate, you have a lot of it left. A middle ground might be to refinance to a 15 or 10 year mortgage. Lately, people are posting rates between 2.5% and 2.875%. Since you can afford to pay the whole thing cash, you clearly can handle the higher monthly payment. The shorter term will allow you to save considerably on overall interest, save on interest rate, retain higher liquidity, and still have a reasonably short payoff period (done before retirement).

You'll have to run the numbers yourself, but you should also keep an eye on what this might do to your taxes. Obviously, the mortgage deduction makes the effective mortgage rate lower, but you are in an interesting income bracket. If you are married filing jointly, the tax brackets are

25%: $75,300 to $151,900
28%: $151,900 to $231,450

Depending on where you are in the range of income you provided and your current deductions, the loss of the mortgage interest deduction could jump your bracket on your marginal dollars.

Edit: delamer beat me to it while I was writing...



Great feedback from all. Delamer and CppCoder, we are pretty solidly in the 28%/jointly so I am not giving much consideration to tax implications. While the 10 or 15 yr notes seem reasonable, I bought the home about a year ago and am not really up to refinancing again.

Since I was converting temporarily to cash, I wanted to consider eliminating the mortgage while cash is on the table rather than immediately jumping back into the market with the entire sum. I can't help but think that the political uncertainty will begin having a negative on the currently over-performing market - I know, I know... timing the market is not a good strategy, but it is where my head is right now. Kick me in it to knock some sense back in!

ScreamyMeMe
Posts: 4
Joined: Fri Aug 05, 2016 5:17 pm

Re: To pay or not to pay off mortgage?

Post by ScreamyMeMe » Fri Aug 05, 2016 8:27 pm

Watty wrote:There is a wiki on this but not a one size fits all right choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

A couple of things to consider.

1) Investing the money and getting a higher return is harder than it sounds. If you would be investing the money with an asset allocation of anywhere near the old saying of "your age in bonds" then you would be putting about 40% of the $213K, or $85K, of the money into bond that are earning a lower interest rate than the mortgage. Even with possible tax advantages that makes it kinda hard to come out ahead much less hit a grans slam.

2) You would have a large sequence of returns risk if you keep the mortgage so if you get unlucky and the investments do badly the next few years then you will have a hard time coming out ahead. I have posted this example before.

 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also paid a $500 a month mortgage out of then;

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


3) Using leverage for investing adds risk and you don't have any apparent need to take additional risk.

In your situation I would just pay it off then invest your "mortgage payment" each month.



Good stuff, Watty - definitely my lean!

NorCalDad
Posts: 712
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: To pay or not to pay off mortgage?

Post by NorCalDad » Fri Aug 05, 2016 8:35 pm

ScreamyMeMe wrote:Great feedback from all. Delamer and CppCoder, we are pretty solidly in the 28%/jointly so I am not giving much consideration to tax implications. While the 10 or 15 yr notes seem reasonable, I bought the home about a year ago and am not really up to refinancing again.

Agree with delamer and Coder. We refi-ed our house a few years ago with PenFed about three months after we bought it, going from 3.625 to 3.125. Didn't bother me at all, and we weren't in position to pay off our loan like you are. I wouldn't think twice about getting a 15-year note - you can find one a full percentage point below what you're paying, and you have the inclination to put more cash toward your mortgage. Seems like the happy medium at a time when 15- and 10-year rates have reached record lows again.

delamer
Posts: 3128
Joined: Tue Feb 08, 2011 6:13 pm

Re: To pay or not to pay off mortgage?

Post by delamer » Fri Aug 05, 2016 8:56 pm

I do not understand this follow up comment from the OP:

"we are pretty solidly in the 28%/jointly so I am not giving much consideration to tax implications. "

At what point do you consider the tax implication?

joebh
Posts: 1708
Joined: Mon Mar 02, 2015 3:45 pm

Re: To pay or not to pay off mortgage?

Post by joebh » Fri Aug 05, 2016 9:19 pm

ScreamyMeMe wrote:I'm not concerned about the mortgage, but there is something empowering to actually be debt free. I suspect I could do marginally better by investing the amount, but was just seeking different opinions and perspectives.


You get to decide how much this empowering feeling is worth to you.

For me, I feel empowered knowing that I could pay off my mortgage whenever I feel the desire to do so, but don't.
In my case, I feel more empowered by having my money in the market, rather than in the walls of my house.

IowaFarmBoy
Posts: 460
Joined: Fri Jan 22, 2010 8:19 am

Re: To pay or not to pay off mortgage?

Post by IowaFarmBoy » Sat Aug 06, 2016 6:39 am

inbox788 wrote:Alternatively, one less conventional plan is to use the bond portion of your investments and pay off your mortgage with that AA, in effect decreasing the bond AA. This is half treating the mortgage as a negative bond, ignoring the liability portion when figuring out the desired AA. Some people who try to use the mortgage as a negative bond and include that in the AA require buying too many bonds, they start very late in equities.


I think this idea from inbox788 makes a lot of sense. I don't think you can safely get 3.6% on bonds anywhere else. If you do this, just plow the money that was going into the mortgage payment into additional investments instead of raising your standard of living.

You may want to review your itemized deductions to see what the impact of not having interest to claim will be. Depending on your situation, if this puts you in a position where your remaining itemized deductions are less than the standard deduction you could have a win on the tax front. You no longer have taxable interest/dividends/capital gains on the money used to pay off the mortgage and you are getting some "free" deductions in the standard deduction. If you still can itemize even without the mortgage interest, this wouldn't be as much of a gain since the extra deduction (beyond the standard) would offset the income. It could be a negative if the money would be invested in something that you expect to produce more capital gains than interest and dividends.

We paid ours off early with an inheritance and it has been a great feeling. We probably lean toward valuing security and being debt-free after having gone through a bankruptcy 25 years ago. It gave us the cash flow to increase savings considerably. No regrets. But as others have said, the relative value of this is really a personal choice.

lostdog
Posts: 633
Joined: Thu Feb 04, 2016 2:15 pm

Re: To pay or not to pay off mortgage?

Post by lostdog » Sat Aug 06, 2016 7:50 am

Pay off the mortgage. Being debt free for me and my wife is a great feeling. You're no longer a slave to the lender. You're actually free!! You have so many more options and you'll notice your stress at work will probably decrease quite a bit.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

User avatar
epicahab
Posts: 82
Joined: Sat Jun 20, 2009 2:29 pm
Location: St. Louis

Re: To pay or not to pay off mortgage?

Post by epicahab » Wed Apr 05, 2017 10:38 am

Having recently paid mine off, do it. Gives a nice little spring in your step.

User avatar
JDCarpenter
Posts: 1353
Joined: Tue Sep 09, 2014 2:42 pm

Re: To pay or not to pay off mortgage?

Post by JDCarpenter » Wed Apr 05, 2017 10:46 am

joebh wrote:
ScreamyMeMe wrote:I'm not concerned about the mortgage, but there is something empowering to actually be debt free. I suspect I could do marginally better by investing the amount, but was just seeking different opinions and perspectives.


You get to decide how much this empowering feeling is worth to you.

For me, I feel empowered knowing that I could pay off my mortgage whenever I feel the desire to do so, but don't.
In my case, I feel more empowered by having my money in the market, rather than in the walls of my house.


As OP noted, it is a subjective call. DW is with you--she recently persuaded me to refi to a 15 year @ 2.75 rather than write a check prior to retirement. I slightly wanted the piece of mind; she strongly felt that cashflow and low rate were a no brainer.

As stated up thread, if you have the means to pay it off, you'll likely be fine either way.
Edit Signature

Post Reply