Author Topic: Paying Off Mortgage As Bond Alternative???  (Read 2888 times)

Catbert

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Paying Off Mortgage As Bond Alternative???
« on: March 21, 2014, 01:01:40 PM »
I've never been a huge fan of paying off mortgages (there always seemed a better investment available).  Now I'm at a point where the mortgage on my principal residence is around 50K and will be paid off in about 3 years.  Interest rate 4.75%* 

I now have extra cash in my investment portfolio because of individual bonds which matured.  Rates on bonds are now really low.  It belatedly occurred to me that if I used the cash to pay off my mortgage it's roughly the same as getting 4.75% on a 3 year bond. 

Am I missing something or should I run down to BoA this afternoon and pay off that mortgage?


*Yes, I know this isn't a great rate now but it was smoking when I got the 15 year mortgage in 2003.  I haven't re-fied the past few years because the balance was so low that a) banks weren't interested in loaning sub-100k atsuper low rate/fees and b) the actual dollar savings was relatively low.   

secondcor521

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #1 on: March 21, 2014, 01:16:19 PM »
I wouldn't run, but I'd pay it off on your next lunch break.

I had exactly the same thought process about my mortgage, which I paid off over the last year or two.  I think the logic is sound.

Two things to point out:

1.  On the bad side, you might be writing off some of the mortgage interest expense on your taxes.  If you are, then the 4.75% isn't quite as good as 4.75% because after you pay off the mortgage your taxes will go up somewhat.  But from what you've said, you may already be at the standard deduction so this wouldn't apply.

2.  On the good side, the 4.75% is guaranteed risk free, which is obviously better than any 3 year bond out there on a risk-adjusted basis.

I'd make sure I had a comfortable emergency fund first, which you probably do.

Good luck!

Catbert

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #2 on: March 21, 2014, 01:43:11 PM »
Thanks for the second opinion, Secondcor521.  I'd forgotten about the interest deduction loss, but total interest would be under 4k over the next 3 years or no big deal.  I think I'll pay it off next week and use the $1500 a month to work on a rental's mortgage. 

Prairie Stash

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #3 on: March 21, 2014, 03:08:51 PM »
I had the same problem once, mortgage was at 5%.  I had a HELOC though at 3.5%.  Instead of refinancing I paid off the loan with the HELOC.

Can you do the same? or is the cost unreasonable? I'm not sure if it changes the decision, I'm just curious if the scenario changes.

Milspecstache

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #4 on: March 21, 2014, 03:39:19 PM »
Thanks for the second opinion, Secondcor521.  I'd forgotten about the interest deduction loss, but total interest would be under 4k over the next 3 years or no big deal.  I think I'll pay it off next week and use the $1500 a month to work on a rental's mortgage.

Another benefit to a HELOC on the rental (when you are under the standard deduction) is that the HELOC's interest can be written off as an expense of the rental.  That makes it better than the interest on your home.

foobar

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #5 on: March 21, 2014, 03:56:43 PM »
When you sign up for 15 year mortgages, you are sort of comitting your self to the debt is bad, pay off the house as soon as possible philosophy.

The only downside to paying off the house is if stocks fall 25%,you will not be able to sell your bonds and buy them. If you were not going to do that anyway, they just pay off the house.

I've never been a huge fan of paying off mortgages (there always seemed a better investment available).  Now I'm at a point where the mortgage on my principal residence is around 50K and will be paid off in about 3 years.  Interest rate 4.75%* 

I now have extra cash in my investment portfolio because of individual bonds which matured.  Rates on bonds are now really low.  It belatedly occurred to me that if I used the cash to pay off my mortgage it's roughly the same as getting 4.75% on a 3 year bond. 

Am I missing something or should I run down to BoA this afternoon and pay off that mortgage?


*Yes, I know this isn't a great rate now but it was smoking when I got the 15 year mortgage in 2003.  I haven't re-fied the past few years because the balance was so low that a) banks weren't interested in loaning sub-100k atsuper low rate/fees and b) the actual dollar savings was relatively low.   

The Happy Philosopher

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Re: Paying Off Mortgage As Bond Alternative???
« Reply #6 on: March 21, 2014, 04:11:51 PM »
Another consideration is that equity in a house is not as liquid as a bond. You have a heloc or home equity loan but that is really not the same thing as a liquid asset you could sell tomorrow. A bank doesn't have to lend you money on your house. As mentioned, you would be less well positioned to rebalance your portfolio in a massive market correction.