Author Topic: A Most Mustachian Mortgage Mire  (Read 5145 times)

Brooks

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A Most Mustachian Mortgage Mire
« on: February 26, 2014, 11:20:09 AM »
I am new to the forums here and only recently discovered MMM. I have been ferociously ingesting content and have a most mustachian mortgage quandary for the group.

Itís interesting to me that personal finance has as much to do with math as it does cerebral control of ones resources.

Background:

∑         Family: Wife + 2 kids, Iím 30
∑         Income: $73,000 USD per year, plus 4k bonus
∑         Emergency fund is 20k
∑         Contribute 15% into a Roth 401k
∑         No debt besides house
∑         Paid $135,000 for house in 2010
∑         Mortgage balance: $65,000
∑         Mortgage rate: 3.625
∑         Mortgage length: 15 years
∑         Normal payment PITI: $979.00

According to some sophisticated calculations I could potentially be mortgage free in 13 months if I were to do the following (Option 1):

∑         Stop all 401k contributions
∑         Therefore, contribute 1800 per month EXTRA to mortgage
∑         Pay 2 bonus checks (4k each, 8k total) towards the mortgage, this yearís and next
∑         When mortgage balance is around 50% of my emergency fund, dump that cash into mortgage and be done. Mortgage free baby!

OR I guess I could pay minimum payments and invest/ save into 401k and other investments with all other dough. (Option 2)

OR continue what I have been doing, paying 1000 extra to mortgage every month and putting 15% in Roth 401k. (Option 3).

 

So what do you think mustachians? Which option would you pick and why? I know it makes the most math sense to pay the minimum to the mortgage and invest the rest (easily beating the 3.625% mortgage). But the draw of being mortgage free has an amazing hold on my mind.

 

 

Cassie

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Re: A Most Mustachian Mortgage Mire
« Reply #1 on: February 26, 2014, 11:26:34 AM »
I would do option 3. You are paying down your mortgage but also funding your Roth. I think that is important because you can never get that time back to compound your $. Your mortgage will still be paid off early which is a wonderful feeling!  I think you can have it all:))

MustachianAccountant

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Re: A Most Mustachian Mortgage Mire
« Reply #2 on: February 26, 2014, 11:32:12 AM »
-Minimum payments on the house
-Fund retirement as much as possible
-Switch to a regular (non Roth) 401k contribution for tax efficency

Money in your house is less liquid than money in the market. Plus, common wisdom says that rates are only going up, putting all that extra cash in an advantaged position. That won't happen if the money is sunk into the mortgage. Finally, for Mustachians headed for FI/RE, tax brackets will be lower in retirement, so it's better to take advantage of tax-free money now. There's plenty of advice in the Investment forum on Roth laddering as you approach early retirement.

(I know there's a psychological boost from owning your home free and clear, and don't want to discount that, but I'm in a similar position to you, and am not accelerating my mortgage payments.)
« Last Edit: February 26, 2014, 11:41:04 AM by MustachianAccountant »

soccerluvof4

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Re: A Most Mustachian Mortgage Mire
« Reply #3 on: February 26, 2014, 11:32:54 AM »
^ +1  with Cassie and MustachianAccountant. You are ahead of the game with the 15 year mortgage to begin with. Seem to be doing well.

Frankies Girl

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Re: A Most Mustachian Mortgage Mire
« Reply #4 on: February 26, 2014, 11:40:08 AM »
Option 2 would be my choice.

Your interest rate is decently low. I would absolutely not stop the 401K payments, and in fact try to ramp them up a bit. If you capture the minimum investment returns average of 7%, you come out ahead and not only that you are lowering your taxable salary, you are also getting tax-free investments, and adding to them now at your age shaves off years and years worth of "catch up" needed if you had started saving more in your 40s or later. Time is one of the biggest factors in achieving a comfortable regular, or early, retirement. Compound interest and growth can't be made up at a later date.

Whatever you do, stopping your 401K would be a lousy move. I don't know what you're invested in, but it's got to be doing better than 3.65%, and you'll be robbing your future self of all that growth.

Paying off a mortgage has a great psychological benefit, and I totally get that. I've wrestled with it myself... and decided to pay my regular payments and stash my extra money in investing where it is earning (currently) way better than what I'd save paying off my mortgage.  Maybe a few hundred here or there towards the mortgage (or some of your bonus) over a year to make yourself feel better about paying it off early, but most of the extra $ would be better spent investing in low cost index funds so you can hit FI that much sooner.


MustachianAccountant

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Re: A Most Mustachian Mortgage Mire
« Reply #5 on: February 26, 2014, 11:45:05 AM »
Also, that emergency fund is kind of large. I used to have a big one (not that big), but have since subscribed to the springy debt emergency fund theory:
http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Dump that 20k into Traditional IRAs (5k husband, 5k wife as a 2013 contribution before April 15, and 5k husband, 5k wife as a 2014 contribution. If you've already filed your taxes, amend 2013 to reflect the IRA contribution)
Then open a 20k HELOC.

Indio

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Re: A Most Mustachian Mortgage Mire
« Reply #6 on: February 26, 2014, 11:58:26 AM »
Do you get corporate match on the 401K? If you do, I wouldn't ever stop the contribution to the point where you lose the match. After all, that is free money.

Brooks

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Re: A Most Mustachian Mortgage Mire
« Reply #7 on: February 26, 2014, 12:22:10 PM »

Thanks for the advice! I think the time for compounding interest is a really good reason not to stop investing, however, I keep telling myself it's only 13 months. I guess I should calculate how much damage I am doing by not maxing out my 401k and IRAs. I do get a 2% match on 4% invested on my 401k. And like a few if you have been saying, the Roth is not the vehicle of choice for someone planning on early FI. I will switch back to the traditional 401k right away.

MustachianAccountant

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Re: A Most Mustachian Mortgage Mire
« Reply #8 on: February 26, 2014, 12:24:25 PM »

Thanks for the advice! I think the time for compounding interest is a really good reason not to stop investing, however, I keep telling myself it's only 13 months. I guess I should calculate how much damage I am doing by not maxing out my 401k and IRAs. I do get a 2% match on 4% invested on my 401k. And like a few if you have been saying, the Roth is not the vehicle of choice for someone planning on early FI. I will switch back to the traditional 401k right away.

Don't think of it as 13 months. Think of it as $65,000.

PeteD01

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Re: A Most Mustachian Mortgage Mire
« Reply #9 on: February 26, 2014, 02:23:02 PM »

Thanks for the advice! I think the time for compounding interest is a really good reason not to stop investing, however, I keep telling myself it's only 13 months. I guess I should calculate how much damage I am doing by not maxing out my 401k and IRAs. I do get a 2% match on 4% invested on my 401k. And like a few if you have been saying, the Roth is not the vehicle of choice for someone planning on early FI. I will switch back to the traditional 401k right away.

You could achieve almost everything important to you within 24 months:

Dump the emergency cash into the mortgage
Get a HELOC for emergencies
Continue $1000 extra principal payments and continue funding your 401k (not Roth)

I don't know your portfolio size and composition but if it is in the 100 to 200k range I would reduce any bond holdings while paying the mortgage. The reason for that is that you are effectively buying back your own negative bonds (mortgage) and are decreasing overall volatility. After the mortgage is paid off, I would use the freed up cash flow to build up to the desired bond allocation - unless stocks happen to be on sale at the time.

Now, if your portfolio is significantly less than 100k, it doesn't make much sense to make anything but minimum mortgage payments.
In that case you should invest everything with a reasonable bond/equity allocation, until your portfolio is able to provide some heavy lifting.


Peter 

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Re: A Most Mustachian Mortgage Mire
« Reply #10 on: February 26, 2014, 02:31:01 PM »
How about a middle way?  Post your budget according to the case study sticky in the ask a mustachian forum.  Use that to cut down your spending ridiculously low (in addition to whatever else you are doing since having come to the blog).
All of this additional money that you save you are allowed to use towards extra mortgage payments.
Once the mortgage is paid off, you of course maintain your new saving level and invest the money instead.

Brooks

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Re: A Most Mustachian Mortgage Mire
« Reply #11 on: February 27, 2014, 10:22:17 AM »
Sheepstache, I would love to have my budget scrutinized by fellow mustachians. I will post it as soon as I can. Thanks for the suggestion.

jrhampt

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Re: A Most Mustachian Mortgage Mire
« Reply #12 on: February 27, 2014, 12:43:32 PM »
Living Stingy has written a lot about the pros of paying off your mortgage (sample post link below, but you can search to see all the posts he's written on the subject).  He even advocates paying off the mortgage at the expense of 401k contributions in some situations, although I have elected not to go that far:

http://livingstingy.blogspot.com/2010/04/pssst-want-to-get-in-on-risk-free.html

We are also in a position where we could potentially pay off out mortgage in about 13 more months.  How are we planning to do this? 

1.  We are still maxing out both of our 401k contributions.  We are in 28% tax bracket and the tax man around here (me) has stipulated that any extra mortgage payments only happen after this is achieved.

2.  We are pausing investments into our taxable accounts until the mortgage is paid off and redirecting that money toward the mortgage.

3.  I sold some municipal bonds and applied that money to principal - my "safe" investment is now the house instead of a bond fund (which has had some minor hits to principal and is thus not totally risk-free anyway).

4.  We are putting both of our bonuses next month on the mortgage (you can still do this, too).

5.  We are not liquidating our taxable accounts to pay off the mortgage except where it makes sense to do so (for example, ditching the muni bond fund).  But we will probably sell some company stock when it vests this spring and apply that to the mortgage in order to diversify our risk.  It is not usually recommended to hold too much company stock with a current employer.

So, what I would do if I were you is probably to go with a slight modification of option 3: keep contributing to the 401k (maybe consider contributing enough only to get the employer match), BUT also dump the bonuses on the mortgage.  How long would that take from now to payoff date?  I am a fan of the increased cash flow that having a paid off mortgage provides, especially having made it through yet another round of layoffs at work recently.