Author Topic: Pay off mortgage or keep it in stocks?  (Read 1827 times)

AlexK

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Pay off mortgage or keep it in stocks?
« on: February 11, 2014, 11:47:21 PM »
I have a mortgage on a rental property, $135k @ 5.9%

Would it be wise to sell stocks and just pay it off? I can make a reasonable argument for both sides. Some might say just refinance but the quotes I've seen are $5k closing costs for that and only slightly better rate (5%) since it is a rental property.

I was thinking keep the mortgage because the stock market historical returns are higher than 5.9%, and there is opportunity cost when you pay off a mortgage because it is not reversible.

On the other hand, I would never borrow a bunch of money at 5.9% to invest in stocks but that is essentially what I'm doing here.

Opinions? If you would keep the mortgage, at what mortgage interest rate would you change your mind?

Khan

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Re: Pay off mortgage or keep it in stocks?
« Reply #1 on: February 12, 2014, 05:17:30 AM »
As a rental property, it is not subject to the Home Mortgage Interest Deduction, which sucks(if I'm reading the IRS right, and it's pretty plain-text for them).

So... at 6%, and a guarenteed 6%, it's a tough call. I would advise you that paying it off at this point is somewhat a form of market timing. That said, it -is- a guaranteed 6% return on your money, which is great at this point in time. Along with that, it may be a decent piece of mind issue. If it were me, I wouldn't destroy all my savings to do it, but I'd enjoy being free from debt like that more than I'd enjoy increasing my investments by an equivalent amount...
...
...
especially in this market.

PeteD01

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Re: Pay off mortgage or keep it in stocks?
« Reply #2 on: February 12, 2014, 07:14:14 AM »
I am assuming that you have been in the market during the last few years and have made some decent paper profits.

You probably have a number of goals you need to achieve for FI.
One of these goals may be owning the rental property outright.
There is nothing preventing you to pay the mortgage off now after realizing the paper profits.
I look at the stock market as one of the means to achieve certain goals and these goals are reached unpredictably due to the unpredictable nature of the market.
So I am advocating market timing - but it is not the market I am timing but the market times certain investments on my to do list.
The crucial difference is that this type of timing does not make any assumptions of future events.

It looks like that Mr Market has put you in the position to pay off your mortgage earlier and if the payoff was one of your goals you should do it now and move on to your next goal - especially at your interest rate.

I faced a similar decision last year when I reached my goal of fixed income much earlier than expected. I sold what I had to and the item is off my to do list now. Funny thing is that I sleep even more soundly than I did before...

All you need to have is an overall financial plan and stick to it if you want to manage risk in this way.

Peter


PeteD01

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Re: Pay off mortgage or keep it in stocks?
« Reply #3 on: February 12, 2014, 07:28:18 AM »

Opinions? If you would keep the mortgage, at what mortgage interest rate would you change your mind?

The interest rate is not the primary determinant for me. I would pay it off even with an interest rate of less than three percent.
I would be satisfied to have reached my goal and eliminated the downside risk - I look at it as a risk I do not have to be exposed to any longer. I am not a company with a business plan providing potential profitability in perpetuity. I am an individual with finite life expectancy working on a retirement plan - that puts me in a much better position when it comes to risk management.

Peter