Author Topic: DONT Payoff your Mortgage Club  (Read 96983 times)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #550 on: April 11, 2018, 08:39:26 AM »
we are quickly approaching the $500K tax free capital gains limit in house value...so that might influence our decision to move sooner.
Now that's an interesting wrinkle... It seems you have lots of choices, which is a beautiful thing. Have you made significant improvements to the property or just riding the market appreciation tidal wave?

What does this mean and why is it good? (Not sarcastic, I actually don't know). We have a house that is riding the market appreciation tidal wave.
From IRS.gov:

Topic Number 701 - Sale of Your Home
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home, provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.

https://www.irs.gov/taxtopics/tc701

Merci. That was my question. Has this rule changed in the past? Has it changed depending on administrations? Or is it one of those long-time rules that one may expect to be around for a while?

That's a "new" rule (1997 Tax Relief Act I believe) and all tax rules are subject to change.....
.

Both the House and the Senate proposed changes to this rule as part of the 2017 tax reform process, including increasing the number of years you had to reside in the home, and phasing out the benefit for high income taxpayers.   The final version did not change the rule, but it shows that there was some desire to change this rule, and that could resurface in the future.
As long as the Cheeto is in charge, who knows what will happen?

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #551 on: April 11, 2018, 11:48:49 AM »
checking in. My 1040 reported $5,500 of dividends from taxable investment accounts, in addition to positive capital gains.

I paid $4,800 in mortgage interest on my primary residence; this figure may increase in 2019 when my ARM starts adjusting. Hopefully the dividend income goes up, too.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #552 on: April 11, 2018, 11:51:18 AM »
checking in. My 1040 reported $5,500 of dividends from taxable investment accounts, in addition to positive capital gains.

I paid $4,800 in mortgage interest on my primary residence; this figure may increase in 2019 when my ARM starts adjusting. Hopefully the dividend income goes up, too.
Nice!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #553 on: April 13, 2018, 09:15:10 AM »
I should be open with the fact that my mortgage balance is $182,000 (total of all debt is about $220,000), while the sum of value of those taxable investment accounts is in excess of $300,000. Crank it up!

Basenji

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Re: DONT Payoff your Mortgage Club
« Reply #554 on: April 13, 2018, 09:34:41 AM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #555 on: April 13, 2018, 10:03:13 AM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

as you get closer to the end of a loan if a REFI is not available the likelihood of the market variablity being worse is higher but this seems like a martket timing play to me vs. just making a plan and sticking to it.

Basenji

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Re: DONT Payoff your Mortgage Club
« Reply #556 on: April 13, 2018, 10:23:20 AM »
Gotcha, makes sense. We'll see how we feel in 20 years ; )

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #557 on: April 13, 2018, 11:47:12 AM »
Gotcha, makes sense. We'll see how we feel in 20 years ; )

yeah no one knows what the tax structure would look like then and thats really where i see something like this possibly changing that could make sense for a paydown lump sum - but as i've always said i'm not against paying down a mortgage if it makes mathematical sense but rarely can you make that case in the current US mortgage climate.

dacalo

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Re: DONT Payoff your Mortgage Club
« Reply #558 on: April 13, 2018, 05:50:01 PM »
Just bought our home for $850k last September with $623k remaining now at 3.875%. It already appreciated $100k, the housing market in the bay area is nuts.

We are going to take our sweet time, that's a lot of debt to pay off lol.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #559 on: April 30, 2018, 12:26:37 PM »
nice welcome -

Going to go on a little rant b/c I'm tired of people giving crappy reasons for why they are paying off their house and why it made sense if they have it paid off.

1. I may have made more investing the last few years but it was just as likely to go down.
2. I have more money to invest now that my house is paid off.
3. I want to avoid a risky situation so i want to take the safer play in paying off my house.
4. It's really just a personal choice i dont need to be optimal.
5. Stock market returns are not guaranteed.
6. Its so much more flexible when you dont have debt.

1. NO no its not just as likely to go down as up or this whole FIRE thing woudnt F*cking work!
2. yeah you do but you dont live in a vacuum of today and missed out on all that other earning while you were paying it down.
3. If you can do it lump sum you lower your risk of unlikely events that you will likely miss (sequence of return and deflation) If you're paying it off with extra over time you're increasing your risk during the paydown period vs investing it does not decrease risk except for total stock market failure (extremely unlikely)
4. you can F*cking say that about anything we face punch people for around here.  Driving a hummer to work is just a personal choice thats suboptimal -but its not as suboptimal as paying down a low fixed rate US mortgage.
5. While they arent guaranteed. If you truly believe this statement and it drives you to pay down a low fixed rate US mortgage than you can NEVER quit working and rely on stocks to support you.  they are completely conflating opinions.
6. how is having 200k - 1MM plus tied up in a fixed hard to sell asset more flexible than having that much money invested in a liquidable equity allocation - the answer - its not
« Last Edit: April 30, 2018, 12:28:18 PM by boarder42 »

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #560 on: April 30, 2018, 02:14:19 PM »
...

Your logical reasoning is just absurd. 
Stop judging me.
Well that might be fine for you but I want o <insert stupid thing here>
etc. etc....

/sarcasm off


On a similar note, is there a formula post somewhere that I can quote on how to calculate the loos-on-return?  Numbers speak to the MMM type much more than words seem to sometimes.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #561 on: April 30, 2018, 02:45:59 PM »
On a similar note, made another standard payment on the family minivan.

48 payments, $6,348.00 principle, 3.140% Interest Rate.

First payment 7-16-2015.
Last payment 6-16-2019.

https://dqydj.com/sp-500-return-calculator/

Annualized S&P Returns with dividends reinvested at 10.514% to date

10.514% - 3.140% = 7.374 Margin.

7.374% x $6,348.00 x 3 years = $1,404.30 Margin Gains across 3 years.
(I know this isn't a perfect calculation method, if anyone has one that takes into account the exponential nature of the equation, I'll gladly hear it)


Ya I could have not invested it and had the "security" of my van by owning outright, but it would have cost me $1,404.30 to date on a $6,348.00 purchase.......

I could pay it off in cash tomorrow- but I won't for the same reasons.  The money in the taxable account is worth WAY more there as a hedge against risk compared to a fixed (not fluid) asset.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #562 on: April 30, 2018, 03:40:52 PM »
...

Your logical reasoning is just absurd. 
Stop judging me.
Well that might be fine for you but I want o <insert stupid thing here>
etc. etc....

/sarcasm off


On a similar note, is there a formula post somewhere that I can quote on how to calculate the loos-on-return?  Numbers speak to the MMM type much more than words seem to sometimes.

I think @tomsang may have something. Could just be a link to a website where you have to do some snacks Excel math your self. Though hthat would he a great spreadsheet to make where you just update the return info for vtsax and input your mortgage terms and it shows you how intelligent you were not paying it down. Would also allow for testing to show how unlikely you are to come out ahead paying down a mortgage

tomsang

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Re: DONT Payoff your Mortgage Club
« Reply #563 on: April 30, 2018, 03:55:20 PM »
I made a calculator a few years ago.  To show the whole side of the transaction. Everyone, focuses on saving interest on the mortgage, but does not account for the loss on the gains on investing.  I have not updated it for the new tax law changes on capital gains, but you can input whatever rate you feel is appropriate.

« Last Edit: April 30, 2018, 04:00:42 PM by tomsang »

tomsang

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Re: DONT Payoff your Mortgage Club
« Reply #564 on: April 30, 2018, 04:06:36 PM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

Type in your assumptions for your future stock market returns.  If we can't beat 2.85% over 30 years, then we are all screwed.  If you don't think that we would hit 2.85%, then it probably makes sense to sell the house as the world is going to hell and we are in a deflationary situation. Rent and watch rent decrease every year vs. having a house that goes down in value every year.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #565 on: April 30, 2018, 07:10:48 PM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

Type in your assumptions for your future stock market returns.  If we can't beat 2.85% over 30 years, then we are all screwed.  If you don't think that we would hit 2.85%, then it probably makes sense to sell the house as the world is going to hell and we are in a deflationary situation. Rent and watch rent decrease every year vs. having a house that goes down in value every year.

Nice.

Holy shit.

Even with my modest 165k house and a not-as-perfect 5.00% loan rate, I still come out millions ahead at the current pace.  3.9mil to be exact.
With a more moderate (and average) market, from 1988 to today, I still come out $350,000 ahead.  About 1/3rd of my FIRE amount.  It would be a margin of 3.09% that is pretty darn sure.  I know I did the math a few years back, but in light of this market run, holy cow does it show...

Nice calculator.

YoungGranny

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Re: DONT Payoff your Mortgage Club
« Reply #566 on: May 01, 2018, 06:03:45 AM »
I switched to this camp this year and started throwing our extra money into a Vanguard account. We're already up to $23k in contributions. The calculator linked is cool - I did our $155k mortgage with our 3.25% mortgage interest and assumed 15% capital gains and 10% investment yield. I think I screwed something up though because it says we only come out ahead $22k in 25 years and it's $77k at 20 years. Obviously investing is still the right strategy but if it's only $22k difference it hardly seems worth it.

Upon further inspection it looks like the pesky capital gains are the reason - when I change it to 0% then I come out $1m ahead - looks like I need to do some more research to get that down.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #567 on: May 02, 2018, 01:35:43 PM »
Made another minimum payment on the mortgage and set up recurring minimum payments on the car loan as well. Just refinanced the car loan at 1.69% which would be crazy to pay down faster.

tyort1

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Re: DONT Payoff your Mortgage Club
« Reply #568 on: May 02, 2018, 02:51:23 PM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

Type in your assumptions for your future stock market returns.  If we can't beat 2.85% over 30 years, then we are all screwed.  If you don't think that we would hit 2.85%, then it probably makes sense to sell the house as the world is going to hell and we are in a deflationary situation. Rent and watch rent decrease every year vs. having a house that goes down in value every year.

Nice calculator!  If I had an extra $1k per month and I put it toward investments rather than mortgage, and my inputs are:

Mortgage rate - 3.9%
Current Mortgage Balance - $345,000
# of Mortgage Payments remaining - 324
Additional Monthly Payment - $1000
Long term Capital Gains Taxes - 15%
Investment Yield - 10%

I come out about $703,000 ahead, just by investing and not paying extra on the mortgage.  Wow.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #569 on: May 03, 2018, 04:33:54 AM »
Have spent way too much time trying to find an old thread here on mortgages from maybe three years ago where it was posited that once you get into 5 years or less on a 30-year, low-interest mortgage, it might hit a crossover point where it would make sense to pay it off. I believe the idea was (a) assuming you plan to pay off the mortgage once and done (and not remortgage like a boss), (b) assuming you have the funds and won't take too bad a tax hit, and (c) that the risk of hitting a recession/downturn within 5 years (rather than over 30) could make finishing it off a reasonable strategy. Anyone else remember this?

Or, for example, should a person with a $500k, 30-year fixed, 2.85% mortgage always just let it ride to the bitter end? Again assuming there's no strong AA impetus to remortgage/reset.

Type in your assumptions for your future stock market returns.  If we can't beat 2.85% over 30 years, then we are all screwed.  If you don't think that we would hit 2.85%, then it probably makes sense to sell the house as the world is going to hell and we are in a deflationary situation. Rent and watch rent decrease every year vs. having a house that goes down in value every year.

Nice calculator!  If I had an extra $1k per month and I put it toward investments rather than mortgage, and my inputs are:

Mortgage rate - 3.9%
Current Mortgage Balance - $345,000
# of Mortgage Payments remaining - 324
Additional Monthly Payment - $1000
Long term Capital Gains Taxes - 15%
Investment Yield - 10%

I come out about $703,000 ahead, just by investing and not paying extra on the mortgage.  Wow.

Yeah it really is nuts. We're not talking pennies here like most would have you think. And if you've been in this camp the last 2-6 years you've basically won already. Highly unlikely paying down a mortgage over investing can beat the gains we've had already.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #570 on: May 03, 2018, 12:41:37 PM »
You missed one: 7. I was able to convince my spouse to throw an extra $3,200 at the mortgage more readily than I was able to convince zher that $3,200 into an IRA would enable us to retire early.

Rufus.T.Firefly

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Re: DONT Payoff your Mortgage Club
« Reply #571 on: May 07, 2018, 03:04:22 PM »
You missed one: 7. I was able to convince my spouse to throw an extra $3,200 at the mortgage more readily than I was able to convince zher that $3,200 into an IRA would enable us to retire early.

7. Answer: Run the numbers in the above Mortgage Payment Calculator to show the surprisingly awesome math to your spouse.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #572 on: May 08, 2018, 07:54:22 AM »
I suspect many of us envy Rufus Firefly's ability to convert all marital disagreements into a matter of math. I have a BS in math, and my wife has a Ph.D. in Applied Mathematics, and, yet, we are not able to do so.

Still, another month paying the minimum mortgage payment is in the books.

Rufus.T.Firefly

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Re: DONT Payoff your Mortgage Club
« Reply #573 on: May 08, 2018, 07:48:08 PM »
I suspect many of us envy Rufus Firefly's ability to convert all marital disagreements into a matter of math. I have a BS in math, and my wife has a Ph.D. in Applied Mathematics, and, yet, we are not able to do so.

Still, another month paying the minimum mortgage payment is in the books.

I accept your pithy reply in good fun.

Likewise, I pity those whose spouse cannot be converted by having a million more dollars instead of a million less.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #574 on: May 09, 2018, 12:00:11 PM »
My wife and I had a discussion about investing and finance in summer of 2016. I showed her some projections under which I thought we'd be retiring with about $2,200,000 in investments, and her first question was: "Will the mortgage be paid off?" At the time, our mortgage balance was about $190,000, so I pointed out how small that was relative to the investment balance, and she seemed persuaded by that. I felt as though the exchange established both the correctness of our cause AND the emotional weight associated with carrying a mortgage.

Since that conversation, our mortgage balance is $9,000 less, and our net worth is $300,000 more. It's mostly in retirement accounts, so there wouldn't be a conversation about using some of those gains to pay down the mortgage anyway.

eightyeighttoone

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Re: DONT Payoff your Mortgage Club
« Reply #575 on: May 13, 2018, 09:55:45 PM »
Hi. Posting to follow all you smart people!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #576 on: May 14, 2018, 08:54:54 AM »
We're trying our best, thanks! Glad to have you in the discussion 88-to-1.

PseudoStache

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Re: DONT Payoff your Mortgage Club
« Reply #577 on: May 15, 2018, 05:59:15 AM »
Hello - Can someone help me understand my numbers (see attached pic) ....  Granted I'm a bit more conservative on the Projected Investment Yield front than most of you at 7%.

My goal is to FIRE in 10-11 years, which is how/why I've calculated my extra monthly payment to be $1629.

Maybe I'm misreading the spreadsheet, but it seems to indicate that after 10-ish years, my "benefit" will only be about $35K-$40K.

I understand that $35K is still better than $0 and could be more if we get better than 7% returns - but it could also be less.

Given my inputs, and FIRE timeline, what would be an optimal strategy?

Should I just stick to my plan of paying extra or is it really worth it to extend this out as long as possible? - which means after 10 years, I'd be paying out of investments rather than earned income.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #578 on: May 15, 2018, 07:24:07 AM »
Do you mow your own lawn vs higher someone at 40/week for 25 weeks?
- difference after 10 years investing - 15k - plus you had to do work.
Do you bring your own lunches vs eat out at a difference of 8/day for 52 weeksx5days?
- difference after 10 years investing - 30.2k - plus you had to do work

Mortgage difference after ten years is much higher than both of those.  So worth it for doing nothing other than redirecting investment to a taxable account i'd say easily worth it.  and 7% is very conservative as your mortgage doesnt index too inflation you've removed inflation from that return but not your mortgage interest rate based on historical returns - make that number the historical avg over 7 years and you'll get a much higher differential. almost 100k more. 

Add to that the fact that keeping a mortgage in FIRE actually increases your chances for success in the worst years.  it only minorly magnifies sequence of return risk but you fail with a mortgage or without it just happens a few years sooner. 

Personally i prefer to play the statistical odds that put things overwhelmingly in my favor in lieu of a feeling of being debt free.  But thats a personal choice for you to make - when presented with data do you choose the best path?
« Last Edit: May 15, 2018, 10:46:01 AM by boarder42 »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #579 on: May 15, 2018, 08:46:39 AM »
Long-time member of the club, here. I've been enjoying my 5/1 ARM at its teaser rate of 3.0% for 53 months.

Unfortunately, the loan servicer just sent me notice that my rate will be increased for my Jan. 1, 2019 payment, perhaps to as high as 5%. Logically, I know I got the math right; emotionally, it was hard to sleep last night. I had thought we might be able to upgrade in 2-3 years, and suddenly that's feeling completely out of reach. Need some support from my friends here who delight in carrying responsible mortgage debt.

Lews Therin

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Re: DONT Payoff your Mortgage Club
« Reply #580 on: May 15, 2018, 09:17:40 AM »
Can't you switch for a better rate?

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #581 on: May 15, 2018, 10:47:20 AM »
Long-time member of the club, here. I've been enjoying my 5/1 ARM at its teaser rate of 3.0% for 53 months.

Unfortunately, the loan servicer just sent me notice that my rate will be increased for my Jan. 1, 2019 payment, perhaps to as high as 5%. Logically, I know I got the math right; emotionally, it was hard to sleep last night. I had thought we might be able to upgrade in 2-3 years, and suddenly that's feeling completely out of reach. Need some support from my friends here who delight in carrying responsible mortgage debt.

why not refi to a fixed rate at 4.5-4.75 or find another ARM.  personally i'd go for the fixed rate unless the arm was still in the 3's even at 5% you're still in pretty great shape.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #582 on: May 15, 2018, 11:34:22 AM »
Long-time member of the club, here. I've been enjoying my 5/1 ARM at its teaser rate of 3.0% for 53 months.

Unfortunately, the loan servicer just sent me notice that my rate will be increased for my Jan. 1, 2019 payment, perhaps to as high as 5%. Logically, I know I got the math right; emotionally, it was hard to sleep last night. I had thought we might be able to upgrade in 2-3 years, and suddenly that's feeling completely out of reach. Need some support from my friends here who delight in carrying responsible mortgage debt.

My whole mortgage is 5% and I'm making bank.

5% is not high.  12% is high. 

@boarder42 , is there a historical resource out there for the average mortgage rate across the years?  That might help ease some minds.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #583 on: May 15, 2018, 12:14:01 PM »
https://fred.stlouisfed.org/graph/?g=NUh 

click max and you can see the history of the 30 year mortgage rate.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #584 on: May 15, 2018, 12:21:48 PM »
Ha! We have excellent credit. We just bought a house to flip. To get the loan, we had to put 50% down and got a rate of 5.125%. Why? Because it's non owner occ, and that's what the lender demanded. Fu-u-u-uck!

Not really. It's still a helluva good rate, but the last decade has spoiled us. It sucked to put that much down, but we had it sitting in cash anyway, so it will be fine.

Moral of the story: go get a fixed rate, 30 year mortgage asap. Then laugh all the way to the bank as rates creep up but yours doesn't. Pay it off on any schedule that makes financial sense to you, but grab a big hunk of that fixed rate money before it's gone.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #585 on: May 15, 2018, 12:32:13 PM »
https://fred.stlouisfed.org/graph/?g=NUh 

click max and you can see the history of the 30 year mortgage rate.
Fun chart! Thanks, @boarder42! I bought my first house in 1988. I think I paid right around 10%. I recall being thrilled to get 7% on my next property, purchased in 1996. Judging by the chart, I did get a helluva rate, but not by today's standards, lol! Thanks for digging that up and sharing it.

PseudoStache

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Re: DONT Payoff your Mortgage Club
« Reply #586 on: May 15, 2018, 01:56:52 PM »
Add to that the fact that keeping a mortgage in FIRE actually increases your chances for success in the worst years.  it only minorly magnifies sequence of return risk but you fail with a mortgage or without it just happens a few years sooner. 

Personally i prefer to play the statistical odds that put things overwhelmingly in my favor in lieu of a feeling of being debt free.  But thats a personal choice for you to make - when presented with data do you choose the best path?

I'm with you on the overall strategy - I get it and I agree.  I think it does make sense for most, and the math is the math. 

I am taking what I consider to be a "balanced" approach to this...  In theory, we could pay off the house today, we are already at a 1.750MM Investable Net Worth.  One of my FIRE goals is to do so without a mortgage.  We save approximately $5K monthly, and could funnel that extra $1629 into those accounts instead of mortgage paydown - but I feel like a difference of $40K (even $100K) over 10 years is not significant enough to me (in lieu of a paid off mortgage) - Facepunch please?

Can you explain the bolded section?  If my house were paid off, with me having a potentially > 4MM Investable Net Worth in 10 years, why would maintaining a mortgage increase my chances for success?  If I don't have a mortgage to pay, wouldn't I be in a better position?

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #587 on: May 15, 2018, 02:53:40 PM »
Add to that the fact that keeping a mortgage in FIRE actually increases your chances for success in the worst years.  it only minorly magnifies sequence of return risk but you fail with a mortgage or without it just happens a few years sooner. 

Personally i prefer to play the statistical odds that put things overwhelmingly in my favor in lieu of a feeling of being debt free.  But thats a personal choice for you to make - when presented with data do you choose the best path?

I'm with you on the overall strategy - I get it and I agree.  I think it does make sense for most, and the math is the math. 

I am taking what I consider to be a "balanced" approach to this...  In theory, we could pay off the house today, we are already at a 1.750MM Investable Net Worth.  One of my FIRE goals is to do so without a mortgage.  We save approximately $5K monthly, and could funnel that extra $1629 into those accounts instead of mortgage paydown - but I feel like a difference of $40K (even $100K) over 10 years is not significant enough to me (in lieu of a paid off mortgage) - Facepunch please?

Can you explain the bolded section?  If my house were paid off, with me having a potentially > 4MM Investable Net Worth in 10 years, why would maintaining a mortgage increase my chances for success?  If I don't have a mortgage to pay, wouldn't I be in a better position?

first WTF do you need 4MM for thats absurd.  but if we use a calculator like http://www.cfiresim.com/input.php  and we input a typical scenario of 1MM in assets and a 4% SWR of 40k with a paid of house that could be mortgaged at say 200k - we get a chance of success of 91.67%  pretty great

then we take that same idea 1.2MM in assets 40k per year plus a 200k mortgage for 30 years at 4% - and we get a chance of success of - 93.5%

2% may not seem like a huge difference but it is when we're talking about running out of money or not.

if you plan is to oversave to infinity then do whatever you want though mortgage or no mortgage who really cares.

Advantages of no mortgage
1. sequence of return risk - when historically back tested you'll still fail in all scenarios when a 4% SWR fails with or without a mortgage its just a matter of failing about 30% sooner but you're going to have to adjust your FIRE plan either way IMO so its a small risk
2. deflation risk- not really a risk IMO

Advantages of mortgage
1. inflation hedge - this is why you see the increase in the success rates with a mortgage b/c it doesnt index to inflation
2. your money will last longer and likely continue to grow.

your lack of feeling like getting 140k for doing nothing basically is quite ridiculous IMO.  If i walked up to future you in ten years and said hey how bout another 140k you'd just say nah i have no use for that money - and i dont know anyone who is deserving of it who may like some extra money - charity/friend who's down on their luck. 

money is money personally those paying down their mortgage b/c ehh 140k isnt that much i'd like to "feel safer" are some of the more selfish people alive.  Those who say who cares i could die with an extra million are some of the more selfish people alive. that money could go to help someone who needs it since you dont seem to think its significant. Could you apply that logic to all FIREes in general b/c they could keep working and make more money to support people yes - but the thing is you dont have to do anything other than click send 1629 to VG vs into my mortgage and forget about it.

PseudoStache

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Re: DONT Payoff your Mortgage Club
« Reply #588 on: May 15, 2018, 03:43:33 PM »
Add to that the fact that keeping a mortgage in FIRE actually increases your chances for success in the worst years.  it only minorly magnifies sequence of return risk but you fail with a mortgage or without it just happens a few years sooner. 

Personally i prefer to play the statistical odds that put things overwhelmingly in my favor in lieu of a feeling of being debt free.  But thats a personal choice for you to make - when presented with data do you choose the best path?

I'm with you on the overall strategy - I get it and I agree.  I think it does make sense for most, and the math is the math. 

I am taking what I consider to be a "balanced" approach to this...  In theory, we could pay off the house today, we are already at a 1.750MM Investable Net Worth.  One of my FIRE goals is to do so without a mortgage.  We save approximately $5K monthly, and could funnel that extra $1629 into those accounts instead of mortgage paydown - but I feel like a difference of $40K (even $100K) over 10 years is not significant enough to me (in lieu of a paid off mortgage) - Facepunch please?

Can you explain the bolded section?  If my house were paid off, with me having a potentially > 4MM Investable Net Worth in 10 years, why would maintaining a mortgage increase my chances for success?  If I don't have a mortgage to pay, wouldn't I be in a better position?

first WTF do you need 4MM for thats absurd.  but if we use a calculator like http://www.cfiresim.com/input.php  and we input a typical scenario of 1MM in assets and a 4% SWR of 40k with a paid of house that could be mortgaged at say 200k - we get a chance of success of 91.67%  pretty great

then we take that same idea 1.2MM in assets 40k per year plus a 200k mortgage for 30 years at 4% - and we get a chance of success of - 93.5%

2% may not seem like a huge difference but it is when we're talking about running out of money or not.

if you plan is to oversave to infinity then do whatever you want though mortgage or no mortgage who really cares.

Advantages of no mortgage
1. sequence of return risk - when historically back tested you'll still fail in all scenarios when a 4% SWR fails with or without a mortgage its just a matter of failing about 30% sooner but you're going to have to adjust your FIRE plan either way IMO so its a small risk
2. deflation risk- not really a risk IMO

Advantages of mortgage
1. inflation hedge - this is why you see the increase in the success rates with a mortgage b/c it doesnt index to inflation
2. your money will last longer and likely continue to grow.

your lack of feeling like getting 140k for doing nothing basically is quite ridiculous IMO.  If i walked up to future you in ten years and said hey how bout another 140k you'd just say nah i have no use for that money - and i dont know anyone who is deserving of it who may like some extra money - charity/friend who's down on their luck. 

money is money personally those paying down their mortgage b/c ehh 140k isnt that much i'd like to "feel safer" are some of the more selfish people alive.  Those who say who cares i could die with an extra million are some of the more selfish people alive. that money could go to help someone who needs it since you dont seem to think its significant. Could you apply that logic to all FIREes in general b/c they could keep working and make more money to support people yes - but the thing is you dont have to do anything other than click send 1629 to VG vs into my mortgage and forget about it.

LOL - Thanks!

If you can guarantee me $140K difference in 10 years, then yes of course I'd do it.... 

Let me clarify: I said $40K (not $140K) and was alluding to the $100K in parentheses that you believe we might be able to get since you think we will get > 7% returns over these next 10 years... I'm not so bullish.  So when I say that $40K is not "significant" enough for me, what I really mean is that the "risk" to potentially get $40K more does not seem worth it to me, over the "guaranteed" freedom of having no mortgage.  I'm concerned about a correction that may not have me fully recovered by the time I retire... We'll see how the next ten years plays out... maybe hindsight will be 20/20.

I contribute quite a bit to charities and friends "down on their luck" throughout the year, so I really hope I'm not one of the most selfish people you know.

You're right that no one NEEDS 4MM - but as my name implies I'm not fully Mustachian - maybe not at all - and I am aiming for fatFIRE and a pretty damn nice early retirement where I get to enjoy volunteering my time/money for causes that I care about along with a Ferrari - if that makes me selfish, that's fine.

I didn't ask you nor anyone else to CARE personally about what I want to do with my mortgage, I was just asking whether it makes sense to extend/maintain it versus paying it off.  If the calculator showed me greater values with my inputs, I would have been all-in.  Right now I'm probably leaning about 75% to continuing the early payoff. 

I am still toying with opening up a separate Vanguard account to test the non-early payoff strategy.




boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #589 on: May 15, 2018, 04:10:30 PM »
So you're planning to market time and bet against history. Best of luck then. But when you don't care about money who gives a fuck.

PseudoStache

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Re: DONT Payoff your Mortgage Club
« Reply #590 on: May 15, 2018, 04:50:17 PM »
So you're planning to market time and bet against history. Best of luck then. But when you don't care about money who gives a fuck.

Why the hostility

You sound like a pretty angry person and are probably an asshole in real life.. best of luck to ya!

Have a blessed day!


MOD EDIT: Forum rule #1.
« Last Edit: May 15, 2018, 09:57:36 PM by arebelspy »

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #591 on: May 15, 2018, 05:54:46 PM »

LOL - Thanks!

If you can guarantee me $140K difference in 10 years, then yes of course I'd do it.... 

Let me clarify: I said $40K (not $140K) and was alluding to the $100K in parentheses that you believe we might be able to get since you think we will get > 7% returns over these next 10 years... I'm not so bullish.  So when I say that $40K is not "significant" enough for me, what I really mean is that the "risk" to potentially get $40K more does not seem worth it to me, over the "guaranteed" freedom of having no mortgage.  I'm concerned about a correction that may not have me fully recovered by the time I retire... We'll see how the next ten years plays out... maybe hindsight will be 20/20.


In my view, having a big pile of money gives me more freedom than paid off mortgage would.   There might be an interesting business opportunity or something down that road that is easy to take advantage of if you have cash.  If the money is in the house, it is a more expensive and difficult thing to do.

Story from two weekends ago:  A dear friend is an MD and while I wouldn't call her Moustachian exactly, she's reasonably savy about money and quite debt adverse.  For example, she paid about $100,000 in student loans in four years by living in an apartment with a room mate.  Drives a modest car that is paid off, etc. 

She meets a great guy who makes quite a bit less than her, and so they get married, have a kid, and buy their dream home.  And it is straight up a cool house.  It cost a lot of money, but it is really great.    Anyway, she has a 2.75% 15-year mortgage that she's been paying down fairly aggressively.   Her plan was that the house is paid before the kid gets to college and the money that had been going to the mortgage could pay for college.  And with the mortgage paid off and kid off to college, they could perhaps downsize to smaller place and rent this place out, for a nice bit of coin. 

The guy turns out to be not that great, and filed for divorce.   I think he's an idiot because she's funny, good-looking, athletic, intelligent, the whole package.   Anyway she lives in a community property state, so she has to take the money that she put into the house, back out of the house so she can pay him his half.   And it is a lot of cash, like $150,000 or something.  So she has to get a HELOC or something, she's not sure what to do.  Anyway, of course I didn't say anything, but had money been invested out side of the house she could have just cut a check.  And now the whole plan to be debt free has been blown up. 

Of course, I'm not suggesting that you are about to be divorced or anything.  Just that circumstances change, and having liquid assets provides flexibility and options.  And flexibility and options provide freedom. 

 

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #592 on: May 15, 2018, 06:58:28 PM »
So you're planning to market time and bet against history. Best of luck then. But when you don't care about money who gives a fuck.

Why the hostility

You sound like a pretty angry person and are probably an asshole in real life.. best of luck to ya!

Have a blessed day!

Quit with the personal attacks man. You came in here asking questions you didn't want the answers to.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #593 on: May 16, 2018, 06:01:19 AM »
So you're planning to market time and bet against history. Best of luck then. But when you don't care about money who gives a fuck.
Why the hostility

You sound like a pretty angry person and are probably an asshole in real life.. best of luck to ya!

Have a blessed day!
MOD EDIT: Forum rule #1.
@PseudoStache, there is a thread that celebrates mortgage payoff, in which apparently no discussion of other/better options is allowed. Then there is this thread, where discussion and learning is encouraged and paying off cheap, affordable, fixed rate, primarily US-based mortgages is not. This is obvious, based on the all-cap "DONT" in the thread title. You have quite possibly just stumbled into the wrong thread. Or you could be a troll. For sure you do not understand B42's direct style. Someone who cares enough to tirelessly teach the same lesson over and over to people who are often hostile, skeptical, and unwilling to listen to reason is clearly NOT what you impolitely suggest he is. As the mods have pointed out, you do not get to do that here or anywhere else on this forum.

One more caution: This forum is populated by a significant number of people who range from casually agnostic to full-on atheist. You're welcome to stay and learn, but please refrain from flamethrowing blessings. As written, your final words are as deserving of redlining as the ones that were.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #594 on: May 16, 2018, 07:15:59 AM »

LOL - Thanks!

If you can guarantee me $140K difference in 10 years, then yes of course I'd do it.... 

Let me clarify: I said $40K (not $140K) and was alluding to the $100K in parentheses that you believe we might be able to get since you think we will get > 7% returns over these next 10 years... I'm not so bullish.  So when I say that $40K is not "significant" enough for me, what I really mean is that the "risk" to potentially get $40K more does not seem worth it to me, over the "guaranteed" freedom of having no mortgage.  I'm concerned about a correction that may not have me fully recovered by the time I retire... We'll see how the next ten years plays out... maybe hindsight will be 20/20.


In my view, having a big pile of money gives me more freedom than paid off mortgage would.   There might be an interesting business opportunity or something down that road that is easy to take advantage of if you have cash.  If the money is in the house, it is a more expensive and difficult thing to do.

Story from two weekends ago:  A dear friend is an MD and while I wouldn't call her Moustachian exactly, she's reasonably savy about money and quite debt adverse.  For example, she paid about $100,000 in student loans in four years by living in an apartment with a room mate.  Drives a modest car that is paid off, etc. 

She meets a great guy who makes quite a bit less than her, and so they get married, have a kid, and buy their dream home.  And it is straight up a cool house.  It cost a lot of money, but it is really great.    Anyway, she has a 2.75% 15-year mortgage that she's been paying down fairly aggressively.   Her plan was that the house is paid before the kid gets to college and the money that had been going to the mortgage could pay for college.  And with the mortgage paid off and kid off to college, they could perhaps downsize to smaller place and rent this place out, for a nice bit of coin. 

The guy turns out to be not that great, and filed for divorce.   I think he's an idiot because she's funny, good-looking, athletic, intelligent, the whole package.   Anyway she lives in a community property state, so she has to take the money that she put into the house, back out of the house so she can pay him his half.   And it is a lot of cash, like $150,000 or something.  So she has to get a HELOC or something, she's not sure what to do.  Anyway, of course I didn't say anything, but had money been invested out side of the house she could have just cut a check.  And now the whole plan to be debt free has been blown up. 

Of course, I'm not suggesting that you are about to be divorced or anything.  Just that circumstances change, and having liquid assets provides flexibility and options.  And flexibility and options provide freedom.

Not an attorney, but I can see how the argument for paying down a shared debt makes sense if you think the marriage is in trouble: a good attorney will find a way to let you live in the house, but stick your spouse with the mortgage payments. I was an expert witness in several cases in which the spouse gave up way more in retirement accounts than she should have in order to keep residency in the marital home, which her income (smaller than his) would have had trouble supporting, were it still carrying the mortgage. People get emotional about houses, so if you're a logical person, you can come out ahead by duping your ex-spouse here.

Rufus.T.Firefly

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Re: DONT Payoff your Mortgage Club
« Reply #595 on: May 17, 2018, 08:52:58 AM »
Pseudo, you're a man of contradictions. You want a low-risk, guarantee on your mortgage. But you're already planning to work extra years so you can buy a Ferrari? How will owning a car that's worth the same amount as your house make your retirement less risky?

B42 already explained the math pretty well.

But here's a missing part of your thought process: you're only considering the first 10 years of the math. Have you consider how the numbers fair 30 or 40 years from now? I think you came here in earnest, so I'll take the time to post this using your figures considering a 30 year time-frame.

Scenario 1: Pay Off Mortgage Early (367K, 3.5% interest, 30 year term)
Additional monthly payment: $1,629

*runs mortgage payoff calculator* (see bankrate.com)
*result: mortgage will be paid off in 11 years, 4 months*

So at the end of 11 years, 4 months, you will have:
Mortgage loan: $0
Additional Investments: $0

Now, presumably you will invest the additional monthly payment + your normal payment in the stock market:
Additional Investment: $3,277/month

*runs investment return calculator* (see bankrate.com)

After the remaining 19 years, you'll have $1,525,048

End result after 30 years:
Mortgage Loan: $0
Additional Investments: $1,525,048

Scenario #2: Pay off Mortgage slowly
Additional Investment: 1,629/month

*runs investment calculator*

After 30 years, you'll have $1,915,810

End result after 30 years:
Mortgage Loan: $0
Additional Investments: $1,915,810

Difference between two scenarios: $390,762

***Note this is with conservative, 7% investment rate of return. If you use 10% return rate instead of 7%, the difference is $1,268,003***



tomsang

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Re: DONT Payoff your Mortgage Club
« Reply #596 on: May 17, 2018, 09:35:51 AM »
Hello - Can someone help me understand my numbers (see attached pic) ....  Granted I'm a bit more conservative on the Projected Investment Yield front than most of you at 7%.

My goal is to FIRE in 10-11 years, which is how/why I've calculated my extra monthly payment to be $1629.

Maybe I'm misreading the spreadsheet, but it seems to indicate that after 10-ish years, my "benefit" will only be about $35K-$40K.

I understand that $35K is still better than $0 and could be more if we get better than 7% returns - but it could also be less.

Given my inputs, and FIRE timeline, what would be an optimal strategy?

Should I just stick to my plan of paying extra or is it really worth it to extend this out as long as possible? - which means after 10 years, I'd be paying out of investments rather than earned income.

Yes, you are misreading the spreadsheet.  If you plan on dying in 10 years, then the $35k would be accurate.  If you plan on living longer, then it shows after 30 years that you will be $168k better off.  If you project it out farther that number will continue to grow. 

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #597 on: May 17, 2018, 05:10:08 PM »
I am starting to get torn about not paying off more of my mortgage.

The interest rate has been creeping up on it.
The mortgage needs to be renewed in 12 months.

  It was still a very good mortgage decision when we got it, but the cashflow to service it now that I am FIRED is quite high out of our monthly income.   And it will only get to be more $$'s as the rates go up.   It was a great mortgage decision when we got it 4 years ago, but now?  hmmm.  Maybe out situation has changed.

Meanwhile, the BOND funds I have money in have lost about 4% of their value.   
AND we have less income and may not re-qualify for the full mortgage amount next year (we can't shop the mortgage this large to other lenders).

Shouldn't I be thinking about moving money from my BOND asset allocation, to get a guaranteed payoff against the mortgage?


Recap --
Have a large variable mortgage renews in 2019.  Currently at 2.85% now.  Has increased from 2.1% in the past 16 months and likely to go to at least 3% this year.

20 year amortization remaining.

5 year variable rates are 2.5% (today, likely to increase)
5 year fixed rates are 3.15% (today, likely to increase, especially if we can't shop it around)

I am currently cashflow negative (drawing from savings), and it will get to be moreso as my mortgage rate increase.

No tax benefits for holding a mortgage - both because of country differences, and also because my income is so low that the Marginal Tax Rate is also quite low.  So don't need to adjust for taxes in the calcs.

Bond fund in my (tax free) investments have dropped (negative returns) over the past 18 months.  Return average over 5 years would at best be, what, 1% more than a mortgage rate?


-- Should I put a large lump sum ($100k to $200k) onto my mortgage, drawing down my fixed income portfolio?--


Le Barbu

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Re: DONT Payoff your Mortgage Club
« Reply #598 on: May 17, 2018, 08:31:27 PM »
I am starting to get torn about not paying off more of my mortgage.

The interest rate has been creeping up on it.
The mortgage needs to be renewed in 12 months.

  It was still a very good mortgage decision when we got it, but the cashflow to service it now that I am FIRED is quite high out of our monthly income.   And it will only get to be more $$'s as the rates go up.   It was a great mortgage decision when we got it 4 years ago, but now?  hmmm.  Maybe out situation has changed.

Meanwhile, the BOND funds I have money in have lost about 4% of their value.   
AND we have less income and may not re-qualify for the full mortgage amount next year (we can't shop the mortgage this large to other lenders).

Shouldn't I be thinking about moving money from my BOND asset allocation, to get a guaranteed payoff against the mortgage?


Recap --
Have a large variable mortgage renews in 2019.  Currently at 2.85% now.  Has increased from 2.1% in the past 16 months and likely to go to at least 3% this year.

20 year amortization remaining.

5 year variable rates are 2.5% (today, likely to increase)
5 year fixed rates are 3.15% (today, likely to increase, especially if we can't shop it around)

I am currently cashflow negative (drawing from savings), and it will get to be moreso as my mortgage rate increase.

No tax benefits for holding a mortgage - both because of country differences, and also because my income is so low that the Marginal Tax Rate is also quite low.  So don't need to adjust for taxes in the calcs.

Bond fund in my (tax free) investments have dropped (negative returns) over the past 18 months.  Return average over 5 years would at best be, what, 1% more than a mortgage rate?


-- Should I put a large lump sum ($100k to $200k) onto my mortgage, drawing down my fixed income portfolio?--

I am not a fan of holding debt and bonds at the same Time. For me, it’s a continuum. First, you have debt and 100% stocks, then deleverage  but still 100% stocks, finaly introduce short term bonds. YMMV, let see what others think!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #599 on: May 17, 2018, 10:59:41 PM »
I am starting to get torn about not paying off more of my mortgage.

The interest rate has been creeping up on it.
The mortgage needs to be renewed in 12 months.

  It was still a very good mortgage decision when we got it, but the cashflow to service it now that I am FIRED is quite high out of our monthly income.   And it will only get to be more $$'s as the rates go up.   It was a great mortgage decision when we got it 4 years ago, but now?  hmmm.  Maybe out situation has changed.

Meanwhile, the BOND funds I have money in have lost about 4% of their value.   
AND we have less income and may not re-qualify for the full mortgage amount next year (we can't shop the mortgage this large to other lenders).

Shouldn't I be thinking about moving money from my BOND asset allocation, to get a guaranteed payoff against the mortgage?


Recap --
Have a large variable mortgage renews in 2019.  Currently at 2.85% now.  Has increased from 2.1% in the past 16 months and likely to go to at least 3% this year.

20 year amortization remaining.

5 year variable rates are 2.5% (today, likely to increase)
5 year fixed rates are 3.15% (today, likely to increase, especially if we can't shop it around)

I am currently cashflow negative (drawing from savings), and it will get to be moreso as my mortgage rate increase.

No tax benefits for holding a mortgage - both because of country differences, and also because my income is so low that the Marginal Tax Rate is also quite low.  So don't need to adjust for taxes in the calcs.

Bond fund in my (tax free) investments have dropped (negative returns) over the past 18 months.  Return average over 5 years would at best be, what, 1% more than a mortgage rate?


-- Should I put a large lump sum ($100k to $200k) onto my mortgage, drawing down my fixed income portfolio?--

I am not a fan of holding debt and bonds at the same Time. For me, it’s a continuum. First, you have debt and 100% stocks, then deleverage  but still 100% stocks, finaly introduce short term bonds. YMMV, let see what others think!
@Le Barbu, funny, I said something very similar on another thread this week. Wish I'd worked that out in my head when I was much younger. I think I was unnecessarily conservative way back then because I failed to realize this. It simply wasn't taught that way then, which, once again, underscores the value of resources like this forum.

@Goldielocks - It would freak me the fuck out to have a mortgage system that's not fixed for a very long period of time and is not tax deductible. My "don't prepay the mortgage" stance assumes both. In your shoes, I'd probably wondering the same things. However, I can't hope to provide an answer your last question without a lot more information. My gut response is "Cash is king, no matter where you live". Good luck, whatever you decide!