Mortgage VS Payoff

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birraj
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Mortgage VS Payoff

Post by birraj » Mon Jan 23, 2017 2:03 pm

Hi,

Recently we moved from Colorado to Texas. Found a perfect home for $430K. Our Colorado Home is for sale in the market. Expecting to get $360K form the Colorado Home sale (No mortgage in Colorado Home). We do have 80 K saved to put Down payment for the Texas home. We are in 28% tax bracket. Since the property taxes are high in TX (9K) thinking of taking a Mortgage for $320K and invest the same $320 K from the Colorado home sale. If I invest in Wellington fund average return for 10 years is around 7%. Getting the 30 year fixed Mortgage for 4% interest rate.

Am I doing the right thing by taking the mortgage for lowest interest rage and tax benefit or shall I pay off the Mortgage? Looking for suggestions.

Thanks
Birraj

Jack FFR1846
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Re: Mortgage VS Payoff

Post by Jack FFR1846 » Mon Jan 23, 2017 2:06 pm

Past performance is no guaranty of future returns.

What if the fund loses 3% over the next 10 years?
Bogle: Smart Beta is stupid

jbird11
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Re: Mortgage VS Payoff

Post by jbird11 » Mon Jan 23, 2017 2:16 pm

How long do you plan to stay at the Texas house?

birraj
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Re: Mortgage VS Payoff

Post by birraj » Mon Jan 23, 2017 2:20 pm

We are planning to stay here for at least another 15 years.

birraj
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Re: Mortgage VS Payoff

Post by birraj » Mon Jan 23, 2017 2:21 pm

True. But consistently My returns are around 6-7% over the past 10 years. I was not using Willington fund. I was using standard Index funds.


Jack FFR1846 wrote:Past performance is no guaranty of future returns.

What if the fund loses 3% over the next 10 years?

robertmcd
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Re: Mortgage VS Payoff

Post by robertmcd » Mon Jan 23, 2017 2:32 pm

If you can wait for the home in Colorado to sell then you could make a cash offer for the new house. Ask yourself this, would you borrow money at 4% to invest in the stock market right now? I know I wouldn't. It is a little different if you are young and starting a life/home/family, in which case I support having a mortgage while investing for retirement, but if you have the cash ready to go then would just pay cash and have no debt. You are looking at your returns for the past 10 years and assuming that will continue. This is possible, but the past 10 years have been about as good as ever for the standard index fund investor (who's portfolio will typically be dominated by US large cap stocks). Be aware that you have been lucky enough to be invested through a strong bull market, but don't take that for granted.

rgs92
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Re: Mortgage VS Payoff

Post by rgs92 » Mon Jan 23, 2017 2:36 pm

There is another consideration. If you can hold on to the funds and place them into tax deferred retirement investments that you could otherwise not afford, that might be an advantage.

harikaried
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Re: Mortgage VS Payoff

Post by harikaried » Mon Jan 23, 2017 2:37 pm

birraj wrote:But consistently My returns are around 6-7% over the past 10 years. I was using standard Index funds.
What would you have done in September 2000? In the 10 years before that, S&P500 consistently returned over 6-7% and then dropped 25% over the next year. Similarly leading up to July 2007, it went up over 7% over the last 10 years (not consistently), then it dropped 20% in the next year; and if you look just a few more months, that "7% over the past 10 years" then became a 40% drop.

Maybe this time it'll be different. ;)

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Kosmo
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Re: Mortgage VS Payoff

Post by Kosmo » Mon Jan 23, 2017 3:55 pm

birraj wrote:Since the property taxes are high in TX (9K) thinking of taking a Mortgage for $320K and invest the same $320 K from the Colorado home sale.

Why do high property taxes lead you to believe that taking a mortgage is a good idea? Also, $9k in property taxes on a $430k property is not high.

In your circumstances I'd probably split the difference. Put down 50%+ and get a 15 yr mortgage for the difference.

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Meg77
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Re: Mortgage VS Payoff

Post by Meg77 » Mon Jan 23, 2017 5:06 pm

What tax bracket are you in? The $9K in property taxes means you will probably always have enough deductions to itemize, so all of the mortgage interest you pay will be deductible for the foreseeable future (besides, you can also deduct sales taxes in Texas). If you are in the 25% tax bracket, that 4% mortgage rate will really only cost you 3% after the benefit of the mortgage interest deduction is applied. I agree with you that you should be able to earn more than 3% after taxes on average over the next 30 years.

HOWEVER, it would reduce your risk - particularly the sequencing risk of returns - to pay off the house and then invest whatever your mortgage payment would have been every month, instead of keeping the loan and investing one big lump sum. This way you are dollar cost averaging your investment over many years rather than investing it all up front. True, lump sum investing beats dollar cost averaging about 65% of the time (depending on which study you read), but given that we are in one of the longest bull markets and still treading around all time stock market highs, I wouldn't want to be using debt to bet that returns will continue to be positive right now.

If you decide to keep the loan, at least go with a 15 year fixed loan with a lower interest rate. That's what my husband and I are doing. Not paying off the mortgage, but we refinanced to a 15 year loan at 2.75% this year to force ourselves to pay it off at least that soon while also using a bit of (very cheap) leverage to invest more heavily.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Afull
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Re: Mortgage VS Payoff

Post by Afull » Mon Jan 23, 2017 5:15 pm

If you've been investing for a number of years, especially if starting before 2008, you know what your risk tolerance is. If you're not single your spouses risk tolerance also and that's the first question.

The math is pretty straight forward you've already got that figured out, get the mortgage.

My wife and I are at opposite poles; I'd go with an interest only note and she'd pay cash. The compromise is to take a 30 year note, 20% down and auto pay a little extra principal each month. If your situation changes in the future you can stop the extra principal payment or payoff the note.

Many ways to compromise: the down payment, the term, the extra principal. Just a math problem.
Last edited by Afull on Mon Jan 23, 2017 5:16 pm, edited 1 time in total.

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Watty
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Re: Mortgage VS Payoff

Post by Watty » Mon Jan 23, 2017 5:15 pm

There is a wiki on this.

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

If you try invest the money with and asset allocation of anywhere near the old saying of "your age in bonds" then you would be paying 4% for the mortgage to buy well over $100K in bonds that are paying around 2% if that. Even with any tax advantages that makes it hard to make any money.

You would also have a huge sequence of returns risk. This is what I have posted before about that;

 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.


I just buy it for cash, or a with a very small mortgage, then you can invest your "mortgage payment".

birraj
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Re: Mortgage VS Payoff

Post by birraj » Mon Jan 23, 2017 9:19 pm

Thanks for all the responses.
Little more about our situations.

We invest the following every year:
401K - Max out 36K /year without employer match
HSA - Max $6750 / Year
Upto Last year Roth IRA for both : 11 K /Year
Taxable investment: 40K/ Year'
529 : 5K /year

This year we are adding 15K in After tax 401k
May be back door Roth at the end of the year: 11K

Apart from this planning to invest the $320K from Colorado home sale and Planning to get Mortgage for $320 at 4% rate.

Hope this clarifies little more.

Thanks
Birraj

drawpoker
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Re: Mortgage VS Payoff

Post by drawpoker » Mon Jan 23, 2017 9:53 pm

What jumps out at me here is that the OP is going from a principal residence where he has enjoyed a mortgage-free existence. Why was that? And for how long ? A few months? Or many years?
Did you pay all-cash when you bought the home? Or, did you take out a mortgage at time of purchase, then, later decide to pre-pay and be rid of it? If so, what were your reasons then? I'd be interested in knowing more on that aspect.
As for basing your decision citing historic returns in the stock market, um, er, surely you are old enough to remember "The Lost Decade", aren't you? 'Nuff said! Also, with the stock market so high right now, you wouldn't want to invest the entire $300K-plus from the Colorado house sale in the market now, would you? I wouldn't. Either dollar-cost average buy method. Or wait for the next Big Dip, right? :D
Since you have the luxury of making a choice on the Texas house purchase I vote with Watty who suggested paying all cash, then investing what would be the mortgage payments in the stock market. IF - you are looking at a 10 to 15 year time horizon.
(Making a cash offer with no mortgage contingency on the Texas house could result in getting the house at a reduced price, plus the offer being accepted much quicker. Depending on the local real estate market conditions, of course)

birraj
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Re: Mortgage VS Payoff

Post by birraj » Tue Jan 24, 2017 8:52 am

We originally took mortgage on the Colorado House and paid it off 5 years back since we were doing only the standard deduction and the mortgage was not enough to do itemized deduction.

Yes I am not planning to put all $320K in the market. Planning to do dollar cost average it.

We are taking the mortgage now as we are already in a contract with a house in TX and the house in Colorado is still for sale. We do not have the cash now.



drawpoker wrote:What jumps out at me here is that the OP is going from a principal residence where he has enjoyed a mortgage-free existence. Why was that? And for how long ? A few months? Or many years?
Did you pay all-cash when you bought the home? Or, did you take out a mortgage at time of purchase, then, later decide to pre-pay and be rid of it? If so, what were your reasons then? I'd be interested in knowing more on that aspect.
As for basing your decision citing historic returns in the stock market, um, er, surely you are old enough to remember "The Lost Decade", aren't you? 'Nuff said! Also, with the stock market so high right now, you wouldn't want to invest the entire $300K-plus from the Colorado house sale in the market now, would you? I wouldn't. Either dollar-cost average buy method. Or wait for the next Big Dip, right? :D
Since you have the luxury of making a choice on the Texas house purchase I vote with Watty who suggested paying all cash, then investing what would be the mortgage payments in the stock market. IF - you are looking at a 10 to 15 year time horizon.
(Making a cash offer with no mortgage contingency on the Texas house could result in getting the house at a reduced price, plus the offer being accepted much quicker. Depending on the local real estate market conditions, of course)

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grabiner
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Re: Mortgage VS Payoff

Post by grabiner » Wed Jan 25, 2017 12:13 am

birraj wrote:True. But consistently My returns are around 6-7% over the past 10 years. I was not using Wellington fund. I was using standard Index funds.


Your returns may have been 6%-7% (but only if you have no foreign stock, which has had poor returnd in the last ten years), but they have not been consistently 6%-7%; you had a huge loss in 2008 and a huge gain in 2009 which happened to cancel out.

You need to consider the risk. You probably hold some bonds; you could sell those bonds to buy stock, and get higher stock returns, but you have chosen not to do so because this would increase your risk. Similarly, if you invest in stock while keeping the mortgage, you are taking more risk.

And by avoiding taking out the mortgage, you are saving more than just the interest rate on the mortgage; you are also avoiding the closing costs which have to deal with getting the mortgage. Your mortgage may have a 4% "interest rate", but it has a higher Annual Percentage Rate, which includes the closing costs. Avoiding the mortgage, or taking out a smaller mortgage, thus saves you more than the 4% interest rate.
David Grabiner

birraj
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Re: Mortgage VS Payoff

Post by birraj » Wed Jan 25, 2017 10:45 am

True, in the mortgage situation my realtor is giving me back the closing costs. My closing cost will be around $1000-$2000.

birraj
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Re: Mortgage VS Payoff

Post by birraj » Mon Apr 03, 2017 11:45 am

Hi All,

Just an update. I have sold my Colorado house and paid of the house in Texas. Initially bought the house in Texas with 10% down 4% rate. Paid 0 closing cost as the agent paid the closing cost for me. Happy that I paid off my house. Thanks all for your inputs.

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