Author Topic: Seems like I may be missing something - mortgage payoff?  (Read 7903 times)

Frankies Girl

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Seems like I may be missing something - mortgage payoff?
« on: September 03, 2013, 04:22:07 PM »
I've read though many threads and off-site articles regarding the advantages/disadvantages of paying off your mortgage, but I think I might have a situation that seems kind of pro-payoff at this point, maybe?

Current mortgage is sitting at about $60K, refi-ed last year to 3.75%

I have enough cash to completely wipe this out now. Was planning on rolling all of it into our existing taxable account, but started thinking about the mortgage aspect...

Up until last year, I have never been able to take any tax benefit to the mortgage interest (too low an amount to make it worth itemizing) but we had some big medical expenditures for 2012 and will also have in our 2013 taxes so it did get counted in, but after that, back to not being a factor.

I do not currently have my 401K maxxed out (it's roughly $9K/yr now), and planned to up my contribution to get it in the 12K/yr neighborhood this next change period.

Both husband and I have Roth IRAs maxed out, and I'll be pulling each year from our taxable account to fund the Roths to the max from here on out. (nice little back door tax sheltering, but it's only 11K/yr allowed, darn it)

We're currently living off of a portion of my salary, banking my husband's entire salary into savings, and a portion of my salary is funding a 401K and some savings. There are absolutely no issues with cash flow - other than we need to stop letting it sit in a crappy savings account earning practically nothing.

So what I've been playing around with is the idea that I could go ahead and pay off the mortgage at the end of this year, and set my 401K to the max contributions ($17.5K/yr). Not paying a mortgage payment would allow me to max my 401K easily and reduce our taxable salary WAY down (we're currently on the high side of the 15% bracket, but there is a chance that soon to come raises and distributions I'm required to take from an inherited account will push us into a higher bracket).

I know that investing the cash into a taxable account should technically earn better than the 3.75% we'd save, but my current taxable account is nearing 200K and that's not counting the large influx of cash I'm soon to be adding, which just adds more to the tax liability - whereas pushing the 401K to the max would allow me to shelter more money in a tax advantaged account and reduce our tax bill at the same time. And hey, no mortgage, so that make us 100% debt free.

Am I missing something here?




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Re: Seems like I may be missing something - mortgage payoff?
« Reply #1 on: September 03, 2013, 04:45:20 PM »
You will be on easy street if you pay off the mortgage. And as you observed, you'll have the added cashflow from your salary, since you don't have a mortgage, to max the 401k.

chasesfish

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #2 on: September 03, 2013, 05:32:37 PM »
+1.  I'd pay off the mortgage then increase 401k contributions up to the maximum.  You can also leave this in taxable investments and still max out your 401k.

Paying off your mortgage is a 4% after tax risk free return.  Banks aren't offering that today

Another Reader

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #3 on: September 03, 2013, 05:56:28 PM »
If you are sitting on that much cash, I don't see why you need to pay off the mortgage to fully fund the 401(k)'s.  Just divert the money going into taxable savings now to pay for your living expenses.  Take a little more from the taxable cash if needed for expenses.

Your rate of return over time on the taxable funds will likely be significantly higher that the return of paying off the mortgage.  There is no income tax on the inherited money, just on the income and capital gains the money produces.  The estate was too small to pay estate tax, if I recall correctly.

If returns from equities decline for an extended period, you can always pay off the mortgage at a later date.  For now, you can collect the net difference.

tomsang

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #4 on: September 03, 2013, 05:59:21 PM »
If you have enough cash to pay off your mortgage, why are you not maxing out your 401k now?  Why do you have so much money in cash?  Why don't you get this deployed in the market?  If the option is leave the money in cash earning .25% or pay off the 3.75% mortgage, then the obvious answer is pay off the mortgage.  If the option is to fund your 401k and Vanguard accounts with a 30 year average earning of 7%, then the obvious answer is to invest and keep the mortgage. 

If you are already FI, then payoff the mortgage.  If you are not FI, then paying off the mortgage vs. investing the money will probably slow down your quest for FI.  You will also be more diversified and liquid with investments vs. a paid off house.

Frankies Girl

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #5 on: September 03, 2013, 06:16:31 PM »
If you have enough cash to pay off your mortgage, why are you not maxing out your 401k now?  Why do you have so much money in cash?  Why don't you get this deployed in the market?  If the option is leave the money in cash earning .25% or pay off the 3.75% mortgage, then the obvious answer is pay off the mortgage.  If the option is to fund your 401k and Vanguard accounts with a 30 year average earning of 7%, then the obvious answer is to invest and keep the mortgage. 

If you are already FI, then payoff the mortgage.  If you are not FI, then paying off the mortgage vs. investing the money will probably slow down your quest for FI.  You will also be more diversified and liquid with investments vs. a paid off house.

Answer to the first part: Inheritance. Had a thread a short while ago in the investor alley section hashing out what should go where, and was set to start rolling cash into taxable account, but started thinking about how I didn't factor in the mortgage payout advantages/disadvanges. Which is what I'm doing now.

In general with an inheritance, it's recommended in just letting stuff sit for a little while you figure out what the hell to do with it all, and my situation was especially complicated for me since there was so much to deal with. Hadn't maxed out the 401K yet as I honestly wasn't as concerned about it since I was putting in a good amount, and I was dealing with death of my father and making sure I didn't do something stupid with what he left me.

Answer to the second part: Yes, already FI. Plan on ER in around 5 years, and husband ER in about 7 years.

So far, it seems like there is a consensus that I'm on the right path paying off the mortgage and then max the 401K and then throw the rest of the cash into the taxable since that is really the only other thing to do with what is left over. This really won't hurt my AA I figured out earlier, but I do think that the advantage of reducing my taxable is something I'm glad I figured out now. :)




pattertall

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #6 on: September 03, 2013, 06:47:24 PM »
So far, it seems like there is a consensus that I'm on the right path paying off the mortgage and then max the 401K and then throw the rest of the cash into the taxable since that is really the only other thing to do with what is left over. This really won't hurt my AA I figured out earlier, but I do think that the advantage of reducing my taxable is something I'm glad I figured out now. :)

I think that's a reasonable plan and might be the best plan based on your personal preferences and risk tolerance.  It's likely not what I would do, however, and I think I may not be the only one in that camp (e.g. Another Reader seems to feel similarly).

I definitely agree on maxing the 401k, but I would retain the mortgage and use a small amount of the inheritance money to cover living expenses (if necessary) as you both pay down the mortgage and max out the 401k each year.  That would allow you to have more flexibility (less money tied up in the house) and to invest the cash that would have gone towards paying down the mortgage.  I'm close to FI (actually, I could be FI if I rented out my house and moved to a lower COLA, but I enjoy my current job and plan to work a few more years), and I have ~25 years left on a mortgage that I could also pay off right now if I chose to.  My rate is also 3.75%, but I'm currently paying the minimum on the mortgage and investing the cash in index funds instead.

Just another opinion to consider.  Fortunately, you are in a position where you are deciding between multiple "good" options :)

markstache

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #7 on: September 03, 2013, 07:30:30 PM »
Are you interested in becoming a landlord? If so, you might think about using that money to buy a property. You have a good rate on your current mortgage and seem in sound financial shape otherwise. A rental property that is cash-flow positive out the door could be a good way to diversify your portfolio.

If that's not something you would be interested in doing, then count me among the pro-payoff camp. Its hard to argue with 3.75% with zero risk.

CopperTex

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #8 on: September 03, 2013, 08:45:37 PM »
Think about how it would feel to walk into your home and know that those walls were YOURS for the rest of your life and then PAY OFF THE MORTGAGE!

Nords

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #9 on: September 03, 2013, 08:46:43 PM »
Am I missing something here?
Here's how the debate goes at our house:
1.  When you're retired you may not have this easy access to cheap loans.
2.  Mortgage rates may never be this low again, and this time we really mean it.
3.  You may sleep better at night with the mortgage paid off.
4.  Paying off 3.75% debt is a short-term gain.  If you keep plenty of liquid cash for the next few years then it won't earn much in CDs, but it'll be available to invest in a bear market or a bargain rental property.  The long-term gains there will be a lot higher than 3.75%.
5.  We have reliable pension income, so it's easy for us to borrow cheap & long and pay it back with fixed (depreciating) dollars.

A new factor has been that as we've gotten older become more secure in our confidence that we have "enough", we're more reluctant to take the same amount of risk for money that we don't need.

However we have 30-year fixed-rate mortgages on both our primary residence and on our rental property.  They'll be paid off by my 80th birthday.  Or at least by my spouse's 79th birthday...

MrsPete

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #10 on: September 04, 2013, 04:23:46 PM »
I don't care a hoot about the "does the math say you should pay off your mortgage" question.  I grew up without much financial security, and almost nothing on earth is worth as much to me as knowing that all these bricks surrounding me are MINE, MINE, MINE, MINE, MINE. 

tomsang

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #11 on: September 04, 2013, 04:54:03 PM »
I don't care a hoot about the "does the math say you should pay off your mortgage" question.  I grew up without much financial security, and almost nothing on earth is worth as much to me as knowing that all these bricks surrounding me are MINE, MINE, MINE, MINE, MINE.

Different perspectives I guess.  I am not saying you are wrong with this approach, just that I would rather have $500,000 in my account to be used in any manner that I choose than to have my assets tied up in a house that could be affected by earthquake, fire, loss of job, desire to move, transaction costs, etc. 

It is easier to walk away from a house when you have your net worth tied up in fairly liquid investments.  As someone mentioned, you are safer owning a little bit of thousands of companies around the world than having your assets tied up in bricks on a 1/4 acre lot.

So I get more comfort looking at my investment statement and seeing that I have 20 years of investments in foreign and domestic stocks, rentals, privately held businesses, deferred comp, and other assets to storm any issues that I may face, you say that you have a house without a mortgage.  We have never seen mortgage rates this low in the history of the US. If we can't beat 3.75% over the next 30 years, then our safe withdrawal rate would be around 1% or your life expectancy vs. the standard 4% which was based on higher returns on investments.

Liquidity also provides access to very lucrative investment opportunities, but that does not matter if you are already FI. 

Argyle

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #12 on: September 04, 2013, 05:20:57 PM »
To me, lack of debt is the biggest freedom.  All the other possible uses for the money are speculative.  This is sure-fire.  And it frees up a big amount of money every month.  I vote enthusiastically for paying it off.

sol

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #13 on: September 04, 2013, 05:28:43 PM »
Despite all of the votes here for paying off the mortgage, I can think of few situations in which it wouldn't be better to maximize your 401k contributions immediately.  The tax break is potentially worth several thousand dollars per year, and you're capped annually so don't let this year's cap slip by unfulfilled.

Where are you in your mortgage amortization schedule?  If you're late in the cycle, then you don't really save much by paying it off because you've already paid most of the interest and now you're working on the principal.  The longer you wait you pay off a traditional mortgage, the less gain there is to be had by doing so.

Argyle

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #14 on: September 04, 2013, 05:41:47 PM »
You may not save in interest by paying the mortgage off early (depending on whether you're paying early or late), but you gain in having much more money free every month.  Of course you need to make sensible choices about what to do with that money.

Frankies Girl

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #15 on: September 04, 2013, 07:03:07 PM »
We refied last year to a 30 year fixed, and before that, we were about 8 years into a 30 year fixed, over a third paid down. With the refi, I've continued paying way over the monthly amount. The refi was a sweet deal, bank had to offer a large amount of no-cost, lower interest refis (as a settlement for some chicanery) and they contacted us even tho we were not personally affected.


I am definitely going to max the 401k at this point, and may pay a large portion of the mortgage off, but will have to do some more thinking on the very good points raised so far.

MrsPete

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #16 on: September 04, 2013, 07:26:05 PM »
I hear you when you say different perspectives, but only a small percentage of my net worth is tied up in this house.  I would not recommend that anyone put all of his or her eggs into a 3 bedroom, 2 bath basket.  When we were young and poor we began investing AND ALSO paid extra on the house every month.  After all, isn't diversification lesson one in Investing 101?

Ignoring the house and my other real estate altogether, I have considerably more than the aforementioned figure in my various investments and accounts.  If the house were destroyed, it would be replaced by insurance, so that is a possibility, but not a serious worry.  I'm in a great location, so I could easily sell or rent this house.  However, having grown up sometimes being what's now called "food insecure" and having worried about bills, even as a child, no single investment means as much to me as my house.  My house is not just another investment -- it is security. 
I don't care a hoot about the "does the math say you should pay off your mortgage" question.  I grew up without much financial security, and almost nothing on earth is worth as much to me as knowing that all these bricks surrounding me are MINE, MINE, MINE, MINE, MINE.

Different perspectives I guess.  I am not saying you are wrong with this approach, just that I would rather have $500,000 in my account to be used in any manner that I choose than to have my assets tied up in a house that could be affected by earthquake, fire, loss of job, desire to move, transaction costs, etc. 

It is easier to walk away from a house when you have your net worth tied up in fairly liquid investments.  As someone mentioned, you are safer owning a little bit of thousands of companies around the world than having your assets tied up in bricks on a 1/4 acre lot.

So I get more comfort looking at my investment statement and seeing that I have 20 years of investments in foreign and domestic stocks, rentals, privately held businesses, deferred comp, and other assets to storm any issues that I may face, you say that you have a house without a mortgage.  We have never seen mortgage rates this low in the history of the US. If we can't beat 3.75% over the next 30 years, then our safe withdrawal rate would be around 1% or your life expectancy vs. the standard 4% which was based on higher returns on investments.

Liquidity also provides access to very lucrative investment opportunities, but that does not matter if you are already FI.

Frankies Girl

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #17 on: September 05, 2013, 09:51:36 AM »
I just realized that some of ya'll are going off the assumption that my house is worth way more than it is... My house is under 100K in value, if it was paid off and put on the market. Small and in a solid and nice working/middle class neighborhood.

This is by no means a large amount of my assets tied up in property (under 15% of my total net worth I think?).

I still can't fathom having a house that costs 3-400K... that's just crazypants to me and I know I'm lucky to have grown up and live currently in areas that don't have housing prices that high for middle class living. ;)

So based off that, I am starting to lean more to the "pay that sucker off" camp, since realizing that it's not a large amount of our assets trapped in equity. I could see where having a much more expensive house/mortgage would be more worrisome when contemplating the pay off/invest factors.
« Last Edit: September 05, 2013, 12:42:49 PM by Frankies Girl »

MrsPete

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #18 on: September 05, 2013, 10:20:54 AM »
I just realized that some of ya'll are going off the assumption that my house is worth way more than it is... My house is under 100K in value, if it was paid off and put on the market. Small and in a solid and nice working/middle class neighborhood.

This is by no means a large amount of my assets tied up in property (under 15% of my total net worth I think?).

I still can't fathom having a house that costs 3-400K... that's just crazypants to me and I know I'm lucky to have grown up and live currently in areas that don't have housing prices that high. ;)

So based off that, I am starting to lean more to the "pay that sucker off" camp, since realizing that it's not a large amount of our assets trapped in equity. I could see where having a much more expensive house/mortgage would be more worrisome when contemplating the pay off/invest factors.
Good point.  I'd not really considered just how much of my net worth is tied up in my house . . . but I see that it's a scant 7% of my net worth.  I agree that a person who's chosen a $300,000-400,000 house would approach this question with a different mind set. 

I also agree that having "that much house" is a bit beyond my comprehension. 

mpbaker22

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #19 on: September 05, 2013, 12:19:17 PM »
I don't care a hoot about the "does the math say you should pay off your mortgage" question.  I grew up without much financial security, and almost nothing on earth is worth as much to me as knowing that all these bricks surrounding me are MINE, MINE, MINE, MINE, MINE.

Different perspectives I guess.  I am not saying you are wrong with this approach,

Mrs Pete did give more perspective on this in later posts, but actually she was wrong.  She's allowing fear to influence her decisions negatively, something that flies directly in the face of MMMs teachings.

It seems as if everyone on this thread has a house that is a smaller percentage of their total assets, but the fact that most  people throw all their money at their house is precisely why many of the 'poor' are 'poor'.

FrugalSpendthrift

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #20 on: September 05, 2013, 02:12:15 PM »
You seem like you are in a financial position that would allow you to max out your 401k, whether the mortgage was paid off or not.  You may get different answers about whether or not to pay it off early, but nobody here will tell you not to take advantage of tax shelters like the 401k.

I recently choose not to pay down my mortgage early and divert the money into an index fund, but I am thinking more long term.

pattertall

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #21 on: September 05, 2013, 02:29:22 PM »
It is true that I had been thinking about the house as a slightly higher % of net worth.  In my case, according to Mint my equity is ~23% of my net worth.  But if I fully paid off the mortgage (selling index funds in a taxable account in order to do so), that would jump to 73% of my net worth!  Clearly this is a situation where I would be over-invested in my house!  A more balanced approach in my case could be applying extra cash each month to pay down the mortgage at an accelerated rate, but I have elected not to do that with the interest rate being so low.

In your case, if the house--after paying off the mortgage--will still be less than 10-15% of your net worth, I could see the argument for paying it down more quickly if that is something that will bring personal satisfaction.  I think I'd still go ahead and make the minimum payments personally, but I could definitely wrap my mind around the benefits of paying it off quickly.

CopperTex

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #22 on: September 06, 2013, 10:19:26 AM »
I don't care a hoot about the "does the math say you should pay off your mortgage" question.  I grew up without much financial security, and almost nothing on earth is worth as much to me as knowing that all these bricks surrounding me are MINE, MINE, MINE, MINE, MINE.

Different perspectives I guess.  I am not saying you are wrong with this approach,

Mrs Pete did give more perspective on this in later posts, but actually she was wrong.  She's allowing fear to influence her decisions negatively, something that flies directly in the face of MMMs teachings.

It seems as if everyone on this thread has a house that is a smaller percentage of their total assets, but the fact that most  people throw all their money at their house is precisely why many of the 'poor' are 'poor'.

I don't see this as fear influencing her decisions. Some people factor in peace of mind into the equation.  Personal finance really is "Personal" + "Finance".  It doesn't always come down to just numbers and most of the poor people I know don't throw all their money at their house - they leverage their house as much as possible to buy more crap.

CorpRaider

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #23 on: September 06, 2013, 12:50:59 PM »
If you can't beat 3.75% over 5 years, you should hire someone to run your money.  You could beat that with 5 year munis guaranteed by water and sewer revenues.

MrsPete

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Re: Seems like I may be missing something - mortgage payoff?
« Reply #24 on: September 06, 2013, 01:19:26 PM »
No, I'm not afraid of losing my house.  If I suddenly had a full mortgage on it, and also suddenly my husband and I both lost our jobs, we could still pay off the whole mortgage easily -- several times.  We have no reason to be fearful.  Rather, I remember the helpless feeling that came from being a child without security; therefore, I value security and value knowing that my house is mine.  I don't want to live that way again. 

While interest rates may be low today, they were not low when we bought our first house and paid it off.  I can't remember exactly, but our interest rate started with a 9.  What will be true tomorrow?  None of us can say with certainty. 

I don't know a whole lot of poor people well enough to discuss finances, but I have the impression that most of them rent. 

I do know middle-class people who have bought "too much house".  Although they can pay their bills, they are always counting the days 'til payday and are essentially "keeping themselves poor" because they've overspent.