Author Topic: DONT Payoff your Mortgage Club  (Read 169253 times)

PathtoFIRE

  • Pencil Stache
  • ****
  • Posts: 559
  • Age: 39
  • Location: Dallas
Re: DONT Payoff your Mortgage Club
« Reply #1350 on: April 04, 2019, 12:25:34 PM »
Outside of a 30 year mortgage (or I guess even a 15 year), is there any expense, both current or imagined future, for which you could have complete knowledge of what you'll pay, year in and year out? That's one of the reassurances that I get out of having a mortgage and keeping it as long as possible. Hell, I'd get an interest-only non-callable perpetual mortgage on my primary house if I could.

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 82
Re: DONT Payoff your Mortgage Club
« Reply #1351 on: April 04, 2019, 12:38:37 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I'm not sure I understand what 'risk' you are worried about.
Are you concerned that you won't be able to pay your mortgage if/when DW stops working?

Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1352 on: April 04, 2019, 12:46:57 PM »
Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

It does.  But what you seem to be concerned with is that if you invest that money now you won't be able to invest as much in the future when your income is less.  That's exactly backwards - you want to maximize both time in the market as well as the tax benefits.

You should always be able to just pay for something that 'comes up' (i.e. emergency expenses) - otherwise you are on too precarious a financial path.

Again you mentioned tax-advantaged accounts, but not taxable ones. What does that picture look like?

My bad. No taxable investments.

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1353 on: April 04, 2019, 12:47:45 PM »
Outside of a 30 year mortgage (or I guess even a 15 year), is there any expense, both current or imagined future, for which you could have complete knowledge of what you'll pay, year in and year out? That's one of the reassurances that I get out of having a mortgage and keeping it as long as possible. Hell, I'd get an interest-only non-callable perpetual mortgage on my primary house if I could.

Is it better to have a predictable expense or no expense at all?

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1354 on: April 04, 2019, 12:49:17 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I'm not sure I understand what 'risk' you are worried about.
Are you concerned that you won't be able to pay your mortgage if/when DW stops working?

Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

There should be- I estimate that I'll finish an MBA about the same time as we have a kid, so I would assume that income will be higher, but I always try to make sure that a plan can work in the worst-case scenario and then anything else is gravy. In the words of MMM, it's all about the safety net.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1355 on: April 04, 2019, 12:50:04 PM »

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

That's where I am confused here.  For 2019 a couple can contribute $12,000k in IRAs and $19k for each 401(k).  jps did not say whether they have one 401(k) or two... but even if its' just one there's $2583/month minimum in tax-advantaged space.  If both spouses have work-sponsored retirement plans (and possibly an HSA) it would be over $4k.

I'm having a hard time imagining any scenario where over-paying the mortgage would make any sense.

ETA: jps responded by saying 'no taxable investments'.  Ok, that (and an efund of sufficient size) should be addressed long before overpaying a mortgage.

Is it better to have a predictable expense or no expense at all?
It's better to have sufficient liquid investments.

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1356 on: April 04, 2019, 12:58:10 PM »

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

That's where I am confused here.  For 2019 a couple can contribute $12,000k in IRAs and $19k for each 401(k).  jps did not say whether they have one 401(k) or two... but even if its' just one there's $2583/month minimum in tax-advantaged space.  If both spouses have work-sponsored retirement plans (and possibly an HSA) it would be over $4k.

I'm having a hard time imagining any scenario where over-paying the mortgage would make any sense.

ETA: jps responded by saying 'no taxable investments'.  Ok, that (and an efund of sufficient size) should be addressed long before overpaying a mortgage.

Is it better to have a predictable expense or no expense at all?
It's better to have sufficient liquid investments.

Yeah, we are not currently maxing both 401k/IRAs.

I think I get what you're saying - it's better to max them now, and then just pay my mortgage, which I will have enough income to do on top of an emergency fund, then to try and get rid of a mortgage that I would not have any problems paying. If I didn't have enough income to pay the mortgage without DW's income, it would be a different story - but would probably mean moving instead of paying the mortgage down anyway.

Thanks, Nereo.
« Last Edit: April 04, 2019, 12:59:49 PM by jps »

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 82
Re: DONT Payoff your Mortgage Club
« Reply #1357 on: April 04, 2019, 01:03:14 PM »

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

That's where I am confused here.  For 2019 a couple can contribute $12,000k in IRAs and $19k for each 401(k).  jps did not say whether they have one 401(k) or two... but even if its' just one there's $2583/month minimum in tax-advantaged space.  If both spouses have work-sponsored retirement plans (and possibly an HSA) it would be over $4k.

I'm having a hard time imagining any scenario where over-paying the mortgage would make any sense.

ETA: jps responded by saying 'no taxable investments'.  Ok, that (and an efund of sufficient size) should be addressed long before overpaying a mortgage.

Is it better to have a predictable expense or no expense at all?
It's better to have sufficient liquid investments.

Yup, I agree with nereo. Not sure I understand the need to pay off the mortgage over contributing to tax advantage accounts.

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1358 on: April 04, 2019, 01:09:15 PM »

I would recommend maxing all tax advantage accounts during your young years and while you have dual income. Set your future self up first. The $1650 combined is barley maxing out one 401k limit. By increasing your 401k contributions, you could also lower your marginal tax rate to under 22%. Then when you decide to expand the family re-evaluate where you want to direct your funds. You could also refinance in a few years for another 15 year term and lower your payment, if the budget is tight with the $650 payment on one income.

Is there movement in increasing your income over the next few years as well?

That's where I am confused here.  For 2019 a couple can contribute $12,000k in IRAs and $19k for each 401(k).  jps did not say whether they have one 401(k) or two... but even if its' just one there's $2583/month minimum in tax-advantaged space.  If both spouses have work-sponsored retirement plans (and possibly an HSA) it would be over $4k.

I'm having a hard time imagining any scenario where over-paying the mortgage would make any sense.

ETA: jps responded by saying 'no taxable investments'.  Ok, that (and an efund of sufficient size) should be addressed long before overpaying a mortgage.

Is it better to have a predictable expense or no expense at all?
It's better to have sufficient liquid investments.

Yup, I agree with nereo. Not sure I understand the need to pay off the mortgage over contributing to tax advantage accounts.

That's why I am here - to learn. It seemed like it could be a smart move to get the mortgage out of the way before my income gets halved.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5024
  • Location: Fayetteville, NC
    • Flipping Fayetteville
Re: DONT Payoff your Mortgage Club
« Reply #1359 on: April 04, 2019, 01:16:53 PM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

@jps ,

12 months at $500 extra plus 24 months of $2500 extra comes to $66,000 in extra premium payments in 3 years.   That, plus your regular payments will get you paid off in 3 to 4 years.

What will you have to show for all that sacrifice in 3-4 years?

A paid off house and lower expenses per month.  Not $650 lower, because you said that was PITI, and paying off the mortgage only covers the PI of PITI.

That's it.   

You might say, but I'll have less stress because the mortgage is gone!   That might or might not be true.

What else could happen in LESS THAN  3-4 years?   

You could get your income cut in half due to an injury, illness, or just bad luck in an economy that's gone sour.   You would still have that mortgage payment so your expenses wouldn't be any lower.  The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

What if you were investing that money instead of paying down the mortgage?

Well, in any of the above situations, you would have more assets to cover you thru the bad times.   You would be less likely to lose the house to foreclosure, even if that same down economy cut stock prices by a bunch.

You could realize you need to move, either to help ill parents or just to get a job.  You can't get at the money locked up in in an unpaid for house as easily as you can by selling investments.   You might need to pay for two residences at the same time if your old one doesn't sell promptly.   

Now, if the economy is doing decently when you've accumulated enough investments to pay off the mortgage early, you'll be able to do it in one big payment in 3-4 years time.   If the economy is down for a bit, then you might wait another year for the market to recover.

Whatever you do, NEVER EVER confuse "the list of advantages I get by paying off my mortgage in full" with "I'm paying extra on my mortgage".   That's because those advantages don't show up until it's completely paid off.

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1360 on: April 04, 2019, 01:20:25 PM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

@jps ,

12 months at $500 extra plus 24 months of $2500 extra comes to $66,000 in extra premium payments in 3 years.   That, plus your regular payments will get you paid off in 3 to 4 years.

What will you have to show for all that sacrifice in 3-4 years?

A paid off house and lower expenses per month.  Not $650 lower, because you said that was PITI, and paying off the mortgage only covers the PI of PITI.

That's it.   

You might say, but I'll have less stress because the mortgage is gone!   That might or might not be true.

What else could happen in LESS THAN  3-4 years?   

You could get your income cut in half due to an injury, illness, or just bad luck in an economy that's gone sour.   You would still have that mortgage payment so your expenses wouldn't be any lower.  The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

What if you were investing that money instead of paying down the mortgage?

Well, in any of the above situations, you would have more assets to cover you thru the bad times.   You would be less likely to lose the house to foreclosure, even if that same down economy cut stock prices by a bunch.

You could realize you need to move, either to help ill parents or just to get a job.  You can't get at the money locked up in in an unpaid for house as easily as you can by selling investments.   You might need to pay for two residences at the same time if your old one doesn't sell promptly.   

Now, if the economy is doing decently when you've accumulated enough investments to pay off the mortgage early, you'll be able to do it in one big payment in 3-4 years time.   If the economy is down for a bit, then you might wait another year for the market to recover.

Whatever you do, NEVER EVER confuse "the list of advantages I get by paying off my mortgage in full" with "I'm paying extra on my mortgage".   That's because those advantages don't show up until it's completely paid off.

My bad- PI itself is $650.

This totally makes sense. You are absolutely right about confusing the advantages of having a paid off mortgage with currently paying extra on the mortgage.

FIreDrill

  • Handlebar Stache
  • *****
  • Posts: 1024
Re: DONT Payoff your Mortgage Club
« Reply #1361 on: April 04, 2019, 01:50:02 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I really don't want to come across as combative, I guess I could just use some help in understanding this math. If I haven't provided enough clarity on my situation please let me know.
Personally I have always made it a priority to max all tax advantaged accounts in order to reduce my tax liability. I take the known guaranteed savings now. If you can live off of 40k and have a high income at 22% tax bracket then in some cases you are still better of maxing all pre tax accounts and then tapping 401ks if a prolonged emergency pops up.

If you saved 22% in taxes on 40k in pre tax contribuions and then you have a year where you need to withdraw 40k in order to cover living expenses you would pay approx 20% in tax and penalties assuming no other income for that year.  This is assuming standard deduction of 22k for married filing jointly with 10% early withdrawal penalty. 

At the 22% bracket it is a "no brainer" to contribute pre tax until you are out of that bracket.

Replying from a phone so I'm sorry if this doesn't make much since. I'd like to get a more detailed example together but I don't have the time at the moment.

Sent from my moto g(6) using Tapatalk


jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1362 on: April 04, 2019, 01:51:42 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I really don't want to come across as combative, I guess I could just use some help in understanding this math. If I haven't provided enough clarity on my situation please let me know.
Personally I have always made it a priority to max all tax advantaged accounts in order to reduce my tax liability. I take the known guaranteed savings now. If you can live off of 40k and have a high income at 22% tax bracket then in some cases you are still better of maxing all pre tax accounts and then tapping 401ks if a prolonged emergency pops up.

If you saved 22% in taxes on 40k in pre tax contribuions and then you have a year where you need to withdraw 40k in order to cover living expenses you would pay approx 20% in tax and penalties assuming no other income for that year.  This is assuming standard deduction of 22k for married filing jointly with 10% early withdrawal penalty. 

At the 22% bracket it is a "no brainer" to contribute pre tax until you are out of that bracket.

Replying from a phone so I'm sorry if this doesn't make much since. I'd like to get a more detailed example together but I don't have the time at the moment.

Sent from my moto g(6) using Tapatalk

Makes sense.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1363 on: April 04, 2019, 01:52:47 PM »
Welcome to the club, jps :-)

In all seriousness - you are must vulnerable if the entire time you are overpaying a mortgage, unless you already have a considerable e-fund and investments in taxable accounts.

If I were in your shoes I would immediately stop paying down the mortgage and instead build up an e-fund equivalent to ~3-6 months expenses.  Then I would open an 'after-tax' (aka 'normal') brokerage account and contribute money until I had ~$5-10k invested.  Once I achieved that I would start piling more money into my tax advantaged (e.g. 401(k), IRA) accounts. 

jps

  • Stubble
  • **
  • Posts: 122
Re: DONT Payoff your Mortgage Club
« Reply #1364 on: April 04, 2019, 02:03:44 PM »
Welcome to the club, jps :-)

In all seriousness - you are must vulnerable if the entire time you are overpaying a mortgage, unless you already have a considerable e-fund and investments in taxable accounts.

If I were in your shoes I would immediately stop paying down the mortgage and instead build up an e-fund equivalent to ~3-6 months expenses.  Then I would open an 'after-tax' (aka 'normal') brokerage account and contribute money until I had ~$5-10k invested.  Once I achieved that I would start piling more money into my tax advantaged (e.g. 401(k), IRA) accounts.

We have a full e-fund. How come you would also put 5-10 in a brokerage before maxing the tax-advantaged accounts? Just as an extra layer of safety?

Boofinator

  • Pencil Stache
  • ****
  • Posts: 826
Re: DONT Payoff your Mortgage Club
« Reply #1365 on: April 04, 2019, 02:10:06 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I really don't want to come across as combative, I guess I could just use some help in understanding this math. If I haven't provided enough clarity on my situation please let me know.
Personally I have always made it a priority to max all tax advantaged accounts in order to reduce my tax liability. I take the known guaranteed savings now. If you can live off of 40k and have a high income at 22% tax bracket then in some cases you are still better of maxing all pre tax accounts and then tapping 401ks if a prolonged emergency pops up.

If you saved 22% in taxes on 40k in pre tax contribuions and then you have a year where you need to withdraw 40k in order to cover living expenses you would pay approx 20% in tax and penalties assuming no other income for that year.  This is assuming standard deduction of 22k for married filing jointly with 10% early withdrawal penalty. 

At the 22% bracket it is a "no brainer" to contribute pre tax until you are out of that bracket.

Replying from a phone so I'm sorry if this doesn't make much since. I'd like to get a more detailed example together but I don't have the time at the moment.

Sent from my moto g(6) using Tapatalk

To analyze FIreDrill's comment a little further, I don't think you'd even pay 20% in taxes should you need to take that money out of the 401k/IRA and pay the penalty. You will receive the $24k standard deduction in the year you pull it out, and then pay 10% on the rest. Adding in the 10% penalty, you'd only be looking at an effective tax rate of about 14%. And keep in mind, this is a low-probability event, in which you'd be saving 8% (22% minus 14%) plus investment returns (otherwise, you get 22% plus investment returns).

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1366 on: April 04, 2019, 02:14:24 PM »
Welcome to the club, jps :-)

In all seriousness - you are must vulnerable if the entire time you are overpaying a mortgage, unless you already have a considerable e-fund and investments in taxable accounts.

If I were in your shoes I would immediately stop paying down the mortgage and instead build up an e-fund equivalent to ~3-6 months expenses.  Then I would open an 'after-tax' (aka 'normal') brokerage account and contribute money until I had ~$5-10k invested.  Once I achieved that I would start piling more money into my tax advantaged (e.g. 401(k), IRA) accounts.

We have a full e-fund. How come you would also put 5-10 in a brokerage before maxing the tax-advantaged accounts? Just as an extra layer of safety?
Exactly.  How much depends on your risk tolerance and individual circumstances.  The e-fund is typically cash-equivalent that won't fluctuate with a market downturn.  The taxable account is invested (so it may drop during a market crash) but is useful for things like replacing a car unexpectedly. You *can* also use money in your Roth (principle can be withdrawn at any time) or your 401(k) (via a loan) but I prefer not to touch those unless absolutely necessary because htey are so valuable as tax-deferred vehicles.

Of course the better your financial picture the less you need to keep 'on the sidelines' (i.e. in an e-fund); if you are living well below your means and have 5 figures in easily accessable   accounts and a stable job and a heloc then you might just go with a 1-2 month 'float' in your checking account.  All depends on the number of layers of safety you have built into your life.

FIreDrill

  • Handlebar Stache
  • *****
  • Posts: 1024
Re: DONT Payoff your Mortgage Club
« Reply #1367 on: April 04, 2019, 02:53:51 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I really don't want to come across as combative, I guess I could just use some help in understanding this math. If I haven't provided enough clarity on my situation please let me know.
Personally I have always made it a priority to max all tax advantaged accounts in order to reduce my tax liability. I take the known guaranteed savings now. If you can live off of 40k and have a high income at 22% tax bracket then in some cases you are still better of maxing all pre tax accounts and then tapping 401ks if a prolonged emergency pops up.

If you saved 22% in taxes on 40k in pre tax contribuions and then you have a year where you need to withdraw 40k in order to cover living expenses you would pay approx 20% in tax and penalties assuming no other income for that year.  This is assuming standard deduction of 22k for married filing jointly with 10% early withdrawal penalty. 

At the 22% bracket it is a "no brainer" to contribute pre tax until you are out of that bracket.

Replying from a phone so I'm sorry if this doesn't make much since. I'd like to get a more detailed example together but I don't have the time at the moment.

Sent from my moto g(6) using Tapatalk

To analyze FIreDrill's comment a little further, I don't think you'd even pay 20% in taxes should you need to take that money out of the 401k/IRA and pay the penalty. You will receive the $24k standard deduction in the year you pull it out, and then pay 10% on the rest. Adding in the 10% penalty, you'd only be looking at an effective tax rate of about 14%. And keep in mind, this is a low-probability event, in which you'd be saving 8% (22% minus 14%) plus investment returns (otherwise, you get 22% plus investment returns).
You are correct.

You would pay...

10% tax for the first 22k
20% for the next 19k
22% for the next 57k (I think, it's whatever the 12% bracket tops out at)




Sent from my moto g(6) using Tapatalk


robartsd

  • Handlebar Stache
  • *****
  • Posts: 2179
  • Location: Northern California
Re: DONT Payoff your Mortgage Club
« Reply #1368 on: April 04, 2019, 03:11:14 PM »
You *can* also use money in your Roth (principle can be withdrawn at any time) or your 401(k) (via a loan) but I prefer not to touch those unless absolutely necessary because they are so valuable as tax-deferred vehicles.
I always like to point out that you are better off emergency fund money into a Roth IRA if you otherwise would not be able to maximize your tax advantaged space. My advice that if you haven't maxed IRA contributions by the time the contribution deadline is approaching, move emergency fund money into a Roth IRA Savings Account to fill up that space. If you later re-establish your emergency fund with taxable money after filling all your tax advantaged space, you can roll that Roth IRA Savings Account into a Roth IRA Investment Account.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1369 on: April 04, 2019, 03:33:49 PM »
You *can* also use money in your Roth (principle can be withdrawn at any time) or your 401(k) (via a loan) but I prefer not to touch those unless absolutely necessary because they are so valuable as tax-deferred vehicles.
I always like to point out that you are better off emergency fund money into a Roth IRA if you otherwise would not be able to maximize your tax advantaged space. My advice that if you haven't maxed IRA contributions by the time the contribution deadline is approaching, move emergency fund money into a Roth IRA Savings Account to fill up that space. If you later re-establish your emergency fund with taxable money after filling all your tax advantaged space, you can roll that Roth IRA Savings Account into a Roth IRA Investment Account.
Good point.  It's unclear whether OP has maxed out available IRAs - though it seems plain that there is plenty of headspace in the 401(k).

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6178
  • Location: BC
Re: DONT Payoff your Mortgage Club
« Reply #1370 on: April 04, 2019, 05:04:34 PM »

Setting up a 5-year roth pipeline to get $ out of a 401k doesn't seem like it supports the idea of "having liquid assets is better than cashflow". And as far as forgoing tax-advantaged accounts to pay extra on the mortgage- that's the crux of my question. In my head, it seems better to be able to contribute a medium amount for the long haul w/ less risk at lower income, than it does to max for a few years and then much less in perpetuity after that once my wife stops working and we still have a mortgage.

What does the rest of your investment picture look like?
I certainly wouldn't put extra into a mortgage if you lack a basic e-fund and some money in taxable accounts.

The advantage of putting more into your tax-advantaged accounts is that you lower your taxable burden today while getting tax-free growth.  As high earners that could be considerable savings -- you are likely in the 22% or 24% bracket depending on your deductions.

Have e-fund. Contributing to 401ks and IRAs at rate of $1650/mo plus some match.

We are just barely in the 22% tax bracket. Our effective tax rate for 2018 was something like 9.9%.

I am working on the math, and it looks like if I play out the difference of $650/month for 20 years after paying off the mortgage, VS maxing tax-advantaged and then having $650 less each month after DW stops working, the difference is $100K over 20 years. That's big $$, but, how do I assess the risk of having $650 less each and every month for another 10 years after we have a kid without the extra liquidity that would come from investing in taxable?

I'm not sure I understand what 'risk' you are worried about.
Are you concerned that you won't be able to pay your mortgage if/when DW stops working?

Not that I won't be able to mortgage - but just worried in general about the tighter cash flow. I've done a speculative budget and it is enough to live on, it's just tighter than I'm used to (obviously with double the income right now). So, wanting to pay off my mortgage would be for a little more breathing room each month, either to just pay for something that comes up, or to invest more each month. It would totally be a comfort thing. Does that make sense?

You are absolutely correct to be worried about and thinking about cash flow, especially if you predict expenses increasing and income decreasing for a while, like when you have kids.  At one point the monthly mortgage payment I was in could not be covered by only one income or ANY upsets in our financial cash flow.

Plus, I find it incredibly hard (emotionally) to sell investments to pay for monthly expenses.  Good theory, but seems wrong or the market is down a bit when I go to do it.  Doubly so if this incurs taxes or another penalty.   Even if investing is the numerically better than paying off the mortgage.

BUT!
Paying off the mortgage is only one way to do it, (reduce future cash flow risks) there are other ways, too.
I eventually invested in ROTH type accounts, that I marked in my mind only for house / future expenses, not retirement, that I could pull the money out on short non-tax notice to pay down the mortgage suddenly (if I chose, in future) or to pay for 1-2 years of maternity leave / part time work, medical expenses.

AND...As always, pay your taxes and get your employer matching on your 401k's first.  (I assume you arelady are, but worth repeating here).

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6178
  • Location: BC
Re: DONT Payoff your Mortgage Club
« Reply #1371 on: April 04, 2019, 05:22:18 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?

RWD

  • Magnum Stache
  • ******
  • Posts: 3097
  • Location: Mississippi
Re: DONT Payoff your Mortgage Club
« Reply #1372 on: April 04, 2019, 07:32:03 PM »
I have never paid for life insurance (though I do get a small amount automatically through my employer). The more our assets grow the less I see a reason for it. It never even crossed my mind that the balance of the mortgage would matter for that. Money is fungible after all.

Blahhhh456

  • 5 O'Clock Shadow
  • *
  • Posts: 82
Re: DONT Payoff your Mortgage Club
« Reply #1373 on: April 04, 2019, 09:54:29 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?


If the life insurance does not pay 100% of the mortgage, is it worth it to keep paying every year? If one of you dies, the other will still have the bill to pay every month, even with the life insurance.

I only have life insurance through my work and includes a small amount for stay at home spouse. I see no reason to have any additional life insurance, at this time.

FIreDrill

  • Handlebar Stache
  • *****
  • Posts: 1024
Re: DONT Payoff your Mortgage Club
« Reply #1374 on: April 04, 2019, 10:18:11 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?
I've kinda always veiwed life insurance as cash flow insurance for my spouse.  Kinda assuming that it would need to be enough to cover the portion of expenses that my income covers.

Recently I have taken a different approach and upped my life insurance through various methods. Mostly getting an additional policy through my employer.  If I go I don't want my spouse to worry about money.  Especially during that time.... The amount I have in coverage will easy cover mortgage payments for 10 years.  If anything it will just make it easier to sell/move/stay/whatever they want to do while processing the lose.  Loosing someone close is a horrible thing to go through as I have recently found out.  I don't want money to be a concern for my spouse in that situation.  All that to say that I think it's a really subjective topic.

Sent from my moto g(6) using Tapatalk


K-ice

  • Pencil Stache
  • ****
  • Posts: 893
  • Location: Canada
Re: DONT Payoff your Mortgage Club
« Reply #1375 on: April 05, 2019, 12:33:24 PM »
Welcome to the club, jps :-)

In all seriousness - you are must vulnerable if the entire time you are overpaying a mortgage, unless you already have a considerable e-fund and investments in taxable accounts.

If I were in your shoes I would immediately stop paying down the mortgage and instead build up an e-fund equivalent to ~3-6 months expenses.  Then I would open an 'after-tax' (aka 'normal') brokerage account and contribute money until I had ~$5-10k invested.  Once I achieved that I would start piling more money into my tax advantaged (e.g. 401(k), IRA) accounts.

We have a full e-fund. How come you would also put 5-10 in a brokerage before maxing the tax-advantaged accounts? Just as an extra layer of safety?


Another option that may, or may not, be possible for you in the US.  Get a HELOC added to your house as an emergency fund before your wife's work situations changes.  Your goal is to keep the balance at ZERO but it is still nice to have.

It can be used as a springy debt emergency fund after you have exhausted your standard EF but before taping into taxable accounts or your ROTH.  MMM has an article on this.

https://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

I will unfortunately need to dip into my HELOC before the end of the month to cover a huge expense that is about double, maybe triple, my emergency fund.  The rate is 4.45%.   It will then be paid back in about 3-4 months but I prefer this over selling investments.

I am a bit tempted to try some CC churning to move this balance to a no interest card for a few months but I like the simplicity of just having one CC.

Anyway, check out the HELOC option, as it will be easier to get approved while you are both employed.
 




EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: DONT Payoff your Mortgage Club
« Reply #1376 on: April 05, 2019, 12:33:46 PM »
The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: DONT Payoff your Mortgage Club
« Reply #1377 on: April 05, 2019, 12:35:30 PM »
Hey there DPYMC, I'm looking for some help w/r/t our mortgage and understanding the costs/benefits of whether or not to pay it off. We have had a mortgage for a few months and have been paying about $500 extra per month.

Mortgage: $75K remaining out of $85K. 15 year note, 4.5%.

Savings: Currently investing $1650/month into 401k and Roth IRAs.

Life situation: Young DINKs, making low six figures. Working to cash flow some necessary projects, which will be fully funded by the end of the year. Once those are funded, will have at least an extra $2-3K/month while both of us are working.

Kicker: would love to start a family in 3-5 years time. If we did, DW would stop working and we would go down to just my income, which is $56K/year. Current PITI is ~$650/mo.

Question: In my head, it makes sense to allocate the extra $ after we save up for necessary projects to paying off our mortgage, rather than to investment accounts, so that we could have an extra $650 in cash flow each month once we go down to one income. I am familiar with the 15/30 year return charts that people post here, but I would love second opinions on how this applies to a situation where income might be dropping significantly in a few years.

@jps ,

12 months at $500 extra plus 24 months of $2500 extra comes to $66,000 in extra premium payments in 3 years.   That, plus your regular payments will get you paid off in 3 to 4 years.

What will you have to show for all that sacrifice in 3-4 years?

A paid off house and lower expenses per month.  Not $650 lower, because you said that was PITI, and paying off the mortgage only covers the PI of PITI.

That's it.   

You might say, but I'll have less stress because the mortgage is gone!   That might or might not be true.

What else could happen in LESS THAN  3-4 years?   

You could get your income cut in half due to an injury, illness, or just bad luck in an economy that's gone sour.   You would still have that mortgage payment so your expenses wouldn't be any lower.  The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

What if you were investing that money instead of paying down the mortgage?

Well, in any of the above situations, you would have more assets to cover you thru the bad times.   You would be less likely to lose the house to foreclosure, even if that same down economy cut stock prices by a bunch.

You could realize you need to move, either to help ill parents or just to get a job.  You can't get at the money locked up in in an unpaid for house as easily as you can by selling investments.   You might need to pay for two residences at the same time if your old one doesn't sell promptly.   

Now, if the economy is doing decently when you've accumulated enough investments to pay off the mortgage early, you'll be able to do it in one big payment in 3-4 years time.   If the economy is down for a bit, then you might wait another year for the market to recover.

Whatever you do, NEVER EVER confuse "the list of advantages I get by paying off my mortgage in full" with "I'm paying extra on my mortgage".   That's because those advantages don't show up until it's completely paid off.

My bad- PI itself is $650.

This totally makes sense. You are absolutely right about confusing the advantages of having a paid off mortgage with currently paying extra on the mortgage.

I agree with SwordGuy.  I never, ever paid extra on my mortgage.  Instead, I only paid it off once I had the funds fully accumulated.  You are much better off investing the funds, letting them grow, and then paying the house off eventually in full, one shot.

EngagedToFIRE

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: DONT Payoff your Mortgage Club
« Reply #1378 on: April 05, 2019, 12:38:56 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?

Insurance is for catastrophes.  For me, dying and leaving my wife and kids without my income is a total catastrophe.  I carry a $1.5M term policy, along with our investments, paid off house, I know my family would be extremely well taken care of and its' worth every bit of the money I pay for it.

I'm not sure I thought much about the size of the mortgage payment when originally getting the term policy, though.  It's an interesting thought.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10056
  • Location: la belle province
    • Here's how you can support science today:
Re: DONT Payoff your Mortgage Club
« Reply #1379 on: April 05, 2019, 12:56:10 PM »
We've thought about life insurance a bit differently than others in this thread.  We are a dual income household and we live off one of our (roughly equal) income streams. It's never made much sense to us to pay the premiums for very large policies. 

Instead, we carry policies on each of us that would cover ~5x our current annual expenses.  The idea is that it would give the survivors a few years of breathing room and (at this point) push them much closer to being FI.  Neither of us really want to be 'taken care of for life' by our deceased spouse any more than we want to inherit our retirement from our parents - it basically goes against our self-sufficient natures.

ender

  • Magnum Stache
  • ******
  • Posts: 4605
Re: DONT Payoff your Mortgage Club
« Reply #1380 on: April 05, 2019, 12:59:41 PM »
The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

It's kind of ironic that by paying down the mortgage faster you increase the risk of having to sell and/or being foreclosed on - if you had the money elsewhere, you would be more able to continue making payments during whatever hardship you had.

Only when the mortgage is $0 does that benefit come into play.

Raenia

  • Pencil Stache
  • ****
  • Posts: 898
Re: DONT Payoff your Mortgage Club
« Reply #1381 on: April 05, 2019, 01:31:44 PM »
Hello everyone, I am jumping in a little early here to keep my resolve firm!  We are buying our first house, closing end of May.  It took some long chats with DH to work through the math, but we are agreed not to pay any extra to the mortgage.

talltexan

  • Handlebar Stache
  • *****
  • Posts: 2319
Re: DONT Payoff your Mortgage Club
« Reply #1382 on: April 05, 2019, 02:25:29 PM »
Welcome, Raenia, you won't regret joining the DNPYM club.

FIreDrill

  • Handlebar Stache
  • *****
  • Posts: 1024
Re: DONT Payoff your Mortgage Club
« Reply #1383 on: April 05, 2019, 02:33:29 PM »
Hello everyone, I am jumping in a little early here to keep my resolve firm!  We are buying our first house, closing end of May.  It took some long chats with DH to work through the math, but we are agreed not to pay any extra to the mortgage.
Welcome!

Sent from my moto g(6) using Tapatalk


moonpalace

  • Stubble
  • **
  • Posts: 203
  • Age: 43
Re: DONT Payoff your Mortgage Club
« Reply #1384 on: April 05, 2019, 02:46:09 PM »
We've thought about life insurance a bit differently than others in this thread.  We are a dual income household and we live off one of our (roughly equal) income streams. It's never made much sense to us to pay the premiums for very large policies. 

Instead, we carry policies on each of us that would cover ~5x our current annual expenses.  The idea is that it would give the survivors a few years of breathing room and (at this point) push them much closer to being FI.  Neither of us really want to be 'taken care of for life' by our deceased spouse any more than we want to inherit our retirement from our parents - it basically goes against our self-sufficient natures.

This is just about exactly what we do, although we have more like 8x annual expenses in coverage. We pay something like $60/month for roughly equal coverage ($500k) on both of us and we'll probably stop paying for it once we're closer to FI. Rate is guaranteed for like 15 years but I think we'll stop paying for it much sooner than that.

K-ice

  • Pencil Stache
  • ****
  • Posts: 893
  • Location: Canada
Re: DONT Payoff your Mortgage Club
« Reply #1385 on: April 05, 2019, 02:48:43 PM »
Hello everyone, I am jumping in a little early here to keep my resolve firm!  We are buying our first house, closing end of May.  It took some long chats with DH to work through the math, but we are agreed not to pay any extra to the mortgage.

Welcome, just be sure to brag about the money you are saving & investing instead of paying of your mortgage.

My investments are now 1.08 x my mortgage.


Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6178
  • Location: BC
Re: DONT Payoff your Mortgage Club
« Reply #1386 on: April 05, 2019, 02:57:43 PM »
The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...
Most people would just pay it off with their investments, I would think, before selling.   That is what we considered as the backup.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6178
  • Location: BC
Re: DONT Payoff your Mortgage Club
« Reply #1387 on: April 05, 2019, 03:03:33 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?

Insurance is for catastrophes.  For me, dying and leaving my wife and kids without my income is a total catastrophe.  I carry a $1.5M term policy, along with our investments, paid off house, I know my family would be extremely well taken care of and its' worth every bit of the money I pay for it.

I'm not sure I thought much about the size of the mortgage payment when originally getting the term policy, though.  It's an interesting thought.

This is interesting.  At some point you would have $1.5 Million in investments plus a paid off house  (or equivalent if you carry a morgage).   Is self-insuring not an option?  At some point you don't need insurance, surely?

I  like term policies precisely because you can ramp your amount up or down according to your needs as you age. 
Examples
Large mortgage, building your investments and pension, steady income is needed,  and small kids = large policy.   
Large mortgage, large investments, moderate income, no minor kids = small policy. 
No mortgage, large investments, low income, no kids = no policy (unless for specific tax reasons).

I am quite interested in all the super "PRO LIFE INSURANCE" comments on a DPOYM thread.   Especially the 5x and 8x expenses.   (I guess if we are talking expenses, that is a lot lower than annual income, though).   The max policy I ever had was $500k... or to top up to 10 years of living expenses needed for the remaining people alive..  I would rather invest the money than pay it to life insurance policies.  ( insert cheeky wink).

« Last Edit: April 05, 2019, 03:13:45 PM by Goldielocks »

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5024
  • Location: Fayetteville, NC
    • Flipping Fayetteville
Re: DONT Payoff your Mortgage Club
« Reply #1388 on: April 05, 2019, 03:53:39 PM »
The house could be foreclosed on due to loss of income and medical expenses, for example.   The fact that you've paid extra on the mortgage just means it's easier for the bank to make their money back.   It probably won't help you at all.

Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

Aside from not trashing your credit with a foreclosure, how does that help you if you can't get a decent price for the house?

Example:  Buy a house for $300,000.    Pump extra on the mortgage to get it down to $230,000 instead of $280,000 via scheduled payments.

Economy hits big recession.  Major employer(s) in area go belly up or lay off thousands of people and you are one of them.  House value drops to $230,000.   You sell the house to avoid foreclosure and lose $50,000 for the privilege.   Happy days are here again.

Had that $50,000 been banked or invested instead, it would have provided many more months of mortgage payments.  Housing values might go up again or you might find employment before that cushion runs out.




Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1713
  • Location: Seattle, WA
Re: DONT Payoff your Mortgage Club
« Reply #1389 on: April 05, 2019, 05:18:46 PM »
Don't pay off your mortgage club -- new question!

I realized that I am choosing to carry term life insurance on DH and I, to about 25% of the mortgage value... even though we would be fine without it, because of the huge mortgage value/ monthly payment that won't stop if one of us dies.  Our cost for it is around $350/yr.

I also know that if we paid off our mortgage using investments, or even dropped it to 50% current value, I would be more than fine to have ZERO life insurance (even with a smaller investment account).

Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?

For me, no.   I buy insurance (of all types) when the risk to me is unacceptably high.  For example, even if I didn't have a mortgage I'd still buy home owner's insurance because while the risk of losing the house to a fire is low, the outcome would be unacceptably bad (to me).   

For the mortgage, I basically self-insure by having a big, fat, investment balance that I contribute to each month.  If something were to happen to me, my wife could draw on that balance for many years if necessary.     And either my wife or I could make the payment on our own anyway. 

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1713
  • Location: Seattle, WA
Re: DONT Payoff your Mortgage Club
« Reply #1390 on: April 05, 2019, 05:25:30 PM »
Hello everyone, I am jumping in a little early here to keep my resolve firm!  We are buying our first house, closing end of May.  It took some long chats with DH to work through the math, but we are agreed not to pay any extra to the mortgage.

Stay the course!  It takes a while, but eventually the power of compounding takes over and your investment account balances explodes.  You simply laugh at your puny mortgage balance.   

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1713
  • Location: Seattle, WA
Re: DONT Payoff your Mortgage Club
« Reply #1391 on: April 05, 2019, 05:26:42 PM »
Aside from not trashing your credit with a foreclosure, how does that help you if you can't get a decent price for the house?

Example:  Buy a house for $300,000.    Pump extra on the mortgage to get it down to $230,000 instead of $280,000 via scheduled payments.

Economy hits big recession.  Major employer(s) in area go belly up or lay off thousands of people and you are one of them.  House value drops to $230,000.   You sell the house to avoid foreclosure and lose $50,000 for the privilege.   Happy days are here again.

Had that $50,000 been banked or invested instead, it would have provided many more months of mortgage payments.  Housing values might go up again or you might find employment before that cushion runs out.

And the other thing is that if you are having trouble paying your mortgage, you will also be having trouble paying your rent.  Liquid assets are king.   

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 27
  • Location: Somewhere in Tejas
Re: DONT Payoff your Mortgage Club
« Reply #1392 on: April 05, 2019, 07:28:18 PM »
Does anyone else notice this?  That keeping a large mortgage payment makes you get term life insurance that you don't absolutely need, all things being equal?

For the wife and I, not at all.  We both have term life insurance (mine is 300k private and about 90k through work, the wife is 600k private), on a 20-year term, but we only got the life insurance as coverage against the loss of life in the event either one of us dies while we are still in the child-raising years.  The money is designed to give us enough room to 'adjust life' if need be in the event of us passing.  It absolutely isn't intended to 'set the other for life' or cover any expenses (because if either of us died, the next step would be to move very close to other family since it would become a single-parent household- at least for a while).  It is coverage against a (hopefully) unlikely event to mitigate the worst financial aspects, not to solve all of life's problems.

Going after term life this way enables us to focus on the best priced plans (20 years, while we are both young) and we should be fully FIRE'd by the time the term ends.  Pretty much all the other (read: older person oriented) options seems to be absolute garbage.  Parents (or at least dad) has whole life insurance and its total crap.  Our insurance rates are 234.00 (annually for me) for 300k and the wife is 240.00 (annually) for 600k.  Per 1000 coverage for me costs $0.78 per year.  Per 1000 for the wife costs $0.40 per year.  Overall, thats really cheap to cover what would already be a very drastic and painful event.

(Also, Guys are apparently more dangerous to insure... 
Math checks out:  https://www.ssa.gov/oact/STATS/table4c6.html
Guy "risk of Death" the next year after 27 is 0.001502
Girl "risk of Death" the next year after 27 is 0.000604)

That being said, no- holding the mortgage hasn't spurred us to carry higher insurance.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9721
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1393 on: April 06, 2019, 01:16:13 AM »
Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...
It happens all the time and it's always a sad story. Old people can't pay their taxes and lose their paid off house. They also didn't have enough cash to maintain it properly, so it sells for far less than decently maintained comps.

A relative was in a similar boat recently. She had a medical emergency that proved costly. The state paid for her care. Now her family needs to sell the house to pay for her continuing care. Surprise! The house is a dump and the state will grab thc proceeds of the sale to pay for her previous care, leaving her and her heirs with nothing from the sale of her run-down, paid-off house.

Here's another real life scenario: My sister lives outside Sacramento, CA. When the market dumped, houses suddenly lost as much as half their value. People lost their jobs and their confidence. They let their houses go back to the bank (jingle mail). The sad thing is that CA real estate has had a spectacular recovery. If those people had just found a way to hang on for a couple of years, their home values would have returned to what they paid and then zoomed beyond it. They'd be fine now. Instead, they're renters with so-so credit histories.

Related real life story: Another friend had leveraged their home to do renovations and pay off other debt. The market dropped and suddenly they were underwater. They felt swamped and decided to walk away and short sale the house. It sold for $762k, which was less than they owed. Since neither of them had lost their jobs, the bank and the IRS came after them. I do not know the results, but I just checked the current value of the house. It's $1.2M. If they has just stayed the course and kept making their payments steadily, they would have been fine.

I'll take an affordable fixed rate mortgage and a nice pile o' cash and investments over prepaying a mortgage every day of the year, every year.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3336
  • Location: Texas
Re: DONT Payoff your Mortgage Club
« Reply #1394 on: April 06, 2019, 09:24:20 AM »
We've thought about life insurance a bit differently than others in this thread.  We are a dual income household and we live off one of our (roughly equal) income streams. It's never made much sense to us to pay the premiums for very large policies. 

Instead, we carry policies on each of us that would cover ~5x our current annual expenses.  The idea is that it would give the survivors a few years of breathing room and (at this point) push them much closer to being FI.  Neither of us really want to be 'taken care of for life' by our deceased spouse any more than we want to inherit our retirement from our parents - it basically goes against our self-sufficient natures.

This is just about exactly what we do, although we have more like 8x annual expenses in coverage. We pay something like $60/month for roughly equal coverage ($500k) on both of us and we'll probably stop paying for it once we're closer to FI. Rate is guaranteed for like 15 years but I think we'll stop paying for it much sooner than that.

We each have term life insurance for ~6x annual expenses, including the mortgage. So: $300k.  This is less than the person who boggled at 6x-8x expenses, yet had previously had $500k of life insurance. Maybe their spend is much higher.

However, once you factor in SSDI survivor's insurance, it's more like 15x expected annual expenses (for the next dozen years anyway.)  Which is long past the time my pension would be available, presuming I keep working. If I die, my wife could start drawing a reduced pension immediately, which along with SSDI would basically cover everything.

Which doesn't count either of our retirement accounts. 

The insurance policies are both pretty cheap term policies which will end in 4 years. It's likely we won't renew due to much higher rates and continued accrual of assets.
« Last Edit: April 06, 2019, 09:30:17 AM by TomTX »

robartsd

  • Handlebar Stache
  • *****
  • Posts: 2179
  • Location: Northern California
Re: DONT Payoff your Mortgage Club
« Reply #1395 on: April 08, 2019, 09:40:27 AM »
Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

Aside from not trashing your credit with a foreclosure, how does that help you if you can't get a decent price for the house?

Example:  Buy a house for $300,000.    Pump extra on the mortgage to get it down to $230,000 instead of $280,000 via scheduled payments.

Economy hits big recession.  Major employer(s) in area go belly up or lay off thousands of people and you are one of them.  House value drops to $230,000.   You sell the house to avoid foreclosure and lose $50,000 for the privilege.   Happy days are here again.

Had that $50,000 been banked or invested instead, it would have provided many more months of mortgage payments.  Housing values might go up again or you might find employment before that cushion runs out.
By definition someone with substantial equity can get quite a bit more money from the sale of the house than the balance remaining on the mortgage. Equity is not based on your purchase price, it is based on current market value.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5024
  • Location: Fayetteville, NC
    • Flipping Fayetteville
Re: DONT Payoff your Mortgage Club
« Reply #1396 on: April 08, 2019, 11:31:19 AM »
Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

Aside from not trashing your credit with a foreclosure, how does that help you if you can't get a decent price for the house?

Example:  Buy a house for $300,000.    Pump extra on the mortgage to get it down to $230,000 instead of $280,000 via scheduled payments.

Economy hits big recession.  Major employer(s) in area go belly up or lay off thousands of people and you are one of them.  House value drops to $230,000.   You sell the house to avoid foreclosure and lose $50,000 for the privilege.   Happy days are here again.

Had that $50,000 been banked or invested instead, it would have provided many more months of mortgage payments.  Housing values might go up again or you might find employment before that cushion runs out.
By definition someone with substantial equity can get quite a bit more money from the sale of the house than the balance remaining on the mortgage. Equity is not based on your purchase price, it is based on current market value.


A technically accurate niggle.


Not at all useful for the purpose at hand, to decide whether it's riskier to pay extra on a mortgage or invest in index funds.

Using the example I gave above, let's assume they pumped $100,000 extra into the mortgage instead of $50,000.

Now they have $50,000 of equity and they sell at the same market price.  They still lost the same $50,000 I already pointed out they lost.

How are they better off than if they had that extra $100,000 in more liquid investments to weather the storm and then sell when the market price of the house had recovered?

Dicey

  • Walrus Stache
  • *******
  • Posts: 9721
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1397 on: April 09, 2019, 06:46:49 AM »
Who would ever let a house with substantial equity be foreclosed on?  You would just sell the house...

Aside from not trashing your credit with a foreclosure, how does that help you if you can't get a decent price for the house?

Example:  Buy a house for $300,000.    Pump extra on the mortgage to get it down to $230,000 instead of $280,000 via scheduled payments.

Economy hits big recession.  Major employer(s) in area go belly up or lay off thousands of people and you are one of them.  House value drops to $230,000.   You sell the house to avoid foreclosure and lose $50,000 for the privilege.   Happy days are here again.

Had that $50,000 been banked or invested instead, it would have provided many more months of mortgage payments.  Housing values might go up again or you might find employment before that cushion runs out.
By definition someone with substantial equity can get quite a bit more money from the sale of the house than the balance remaining on the mortgage. Equity is not based on your purchase price, it is based on current market value.


A technically accurate niggle.


Not at all useful for the purpose at hand, to decide whether it's riskier to pay extra on a mortgage or invest in index funds.

Using the example I gave above, let's assume they pumped $100,000 extra into the mortgage instead of $50,000.

Now they have $50,000 of equity and they sell at the same market price.  They still lost the same $50,000 I already pointed out they lost.

How are they better off than if they had that extra $100,000 in more liquid investments to weather the storm and then sell when the market price of the house had recovered?
Can you hold on a sec? I wanna make some popcorn. I love this conversation!

My old, Finally FIRE self so wishes I had known this stuff when I bought my first house. Real Estate made me rich, but I could have hit FIRE so much sooner had this info been readily available way back in 1988.

FIreDrill

  • Handlebar Stache
  • *****
  • Posts: 1024
Re: DONT Payoff your Mortgage Club
« Reply #1398 on: April 12, 2019, 09:16:14 AM »
Hey look, more money.... #Payday

4/12/19

726 to 401k
269 to HSA
605 to Espp (Minimum 15% discount. Profits will be taken right away at end of offering period)
462 to Taxable Brokerage

Investment Tracking
2/15/19   - $372,432
3/1/19     - $377,098
3/29/19   - $390,738
4/12/19   - $404,719


Been moving a lot of money around lately with rollovers and what not.  Pretty excited to break the 400k invested mark though! :)






Sent from my moto g(6) using Tapatalk


Dicey

  • Walrus Stache
  • *******
  • Posts: 9721
  • Age: 61
  • Location: NorCal
Re: DONT Payoff your Mortgage Club
« Reply #1399 on: April 12, 2019, 10:19:13 AM »
Hey look, more money.... #Payday

4/12/19

726 to 401k
269 to HSA
605 to Espp (Minimum 15% discount. Profits will be taken right away at end of offering period)
462 to Taxable Brokerage

Investment Tracking
2/15/19   - $372,432
3/1/19     - $377,098
3/29/19   - $390,738
4/12/19   - $404,719


Been moving a lot of money around lately with rollovers and what not.  Pretty excited to break the 400k invested mark though! :) ...
That's quite a milestone...congratulations!