Author Topic: Paying off home mortgage good idea?  (Read 1129 times)

dragonwalker

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Paying off home mortgage good idea?
« on: March 05, 2023, 02:16:03 AM »
Iím currently 35, single, live near Los Angeles and make about $70K annual from work, $6K in dividend income, and $12K in rent income.
I have a 2B2B condo I bought in 2021 for $375K with $265K left on the loan. No other debt.

My loan is unique in that as an employee I essentially have a special ARM mortgage that can change every quarter and is currently at 1.549% (but expected to go up). Itís low enough that I have to pay imputed income on the difference between that and the Applicable Federal Rate which is about 4.40% so that comes out to an additional $300 per month towards taxes.
My monthly mortgage is now $883/month, annual property tax at $5200. Monthly HOA $491/month and I collect room from a tenant in the spare room.   

I have about $436K in brokerage accounts (S&P 500 ETFs mostly with about $150K in Apple), $250K in 401K/IRAs, and $50K cash. Iím currently getting a graduate degree which the company is mostly paying for but I may have to pay $5K in the next year to finish off the program. I am considering a car in the next 1-2 years that could run $20-$30K.
My capital gains from my brokerage is about 50% of its current value.

Iím working on improving my annual income and substantially higher income is probable in the next 3+ years. Iím not necessarily looking to FIRE but I just want to optimize my financial situation as much as possible. I know the 50K in cash is not optimal but Iím a little leery of the market. Iíve been mostly in the market since 2010 and Iíve benefitted greatly from it but it still makes me wonder sometimes.

Does it make sense financially to use a combination of cash and capital gains to payoff my mortgage?

I would feel more financially secure especially because I have a weird mortgage whereby if I left the company it turns into a 5/5 ARM and for instance if I left today would jump to about 2.8% and reset in 3 more years almost certainly to 3%+.

Iím only getting half the interest deduction since I use half for my rental and after doing taxes this year Iím still only just taking the standard deduction.   

nereo

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Re: Paying off home mortgage good idea?
« Reply #1 on: March 05, 2023, 04:45:06 AM »
I would never pay off a mortgage at that rate if I didnít have to, and I still would never pay off a mortgage early if the rate jumped to 4%, especially in our higher interest environment.  And I ESPECIALLY would not tap your $436 in existing savings to ax this mortgage, which would leave you in a much weaker overall position by transferring about two-thirds of your taxable savings into your home, leaving you with the bulk of your NW in a single asset.

To address this feeling of security, Iíd recommend establishing a home mortgage sinking fund. Basically itís a separate account where you put all the dollars you otherwise could put towards additional mortgage payments. If ever there comes a time when the mortgage rate climbs north of 3% + inflation, you can use those funds to eliminate the mortgage.

Catbert

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Re: Paying off home mortgage good idea?
« Reply #2 on: March 05, 2023, 12:51:09 PM »
I think Nereo nailed it.  Hang on to that mortgage as long as you can.  If you leave and it resets to a 5/5 ARM then you can consider maybe accelerating payments if interest rates look like they'd be much higher after 5 years.  I personally wouldn't bother with a sinking fund, but if you're really concerned that would be the way to go.

Dicey

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Re: Paying off home mortgage good idea?
« Reply #3 on: March 09, 2023, 03:52:28 AM »
Yup, what nereo said.

You have a perk that few people have access to. Paying off the mortgage makes that fat perk disappear. If you have enough to pay it off, you can easily handle an ARM while your money has even more time to grow.

Want to save money and protect your investment? Get on the board and make sure the HOA is spending those dues wisely and not deferring maintenance.

The real issue is the amount you have tied up Apple stock, not the mortgage

Villanelle

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Re: Paying off home mortgage good idea?
« Reply #4 on: March 09, 2023, 10:32:12 AM »
Yup, my first thought was almost exactly what Nereo said.  Save money, perhaps in a more conservative way than the rest of your investments if you need that security, and use that to pay off/down the mortgage if you leave the job. 

Are you renting a room in your home, or do you have a separate rental property? 

dragonwalker

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Re: Paying off home mortgage good idea?
« Reply #5 on: March 09, 2023, 11:44:28 PM »
I'm renting a room in my condo.

yachi

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Re: Paying off home mortgage good idea?
« Reply #6 on: March 10, 2023, 04:34:27 PM »
Your taxes due to the fact that the rate is lower than the AFR seem high.  The difference between the AFR rate and yours is $630 in interest per month.  For that to cost you $300 in taxes (a 47.6% all-in tax) seems excessive.  Also, why isn't the long-term AFR of 3.68% applicable instead?

All that aside, it appears to me that we can consider this a regular loan with a 2.9% interest rate [(300*12)/265,000+1.549%].

I just checked our latest inflation numbers and it's about 6.4%.  What that means is that you could have bought a few tons of raw material last year for $265,000, and sold it today for $281,960 - but you wouldn't be any richer.  That material held it's value while money stuffed under your mattress lost it.

But you have a loan with an interest rate below inflation.  What that means is you essentially have a faucet pouring cash into your net worth at the rate of $861.25 per month.  (6.8%-2.9%)*265,000/12 = $861.25.  You're asking if you should turn this faucet off, the answer is no.  All you have to do support the faucet of cash is have the $625K in something that tracks inflation (like a few tons of steel) not something that loses to inflation (like dollar bills under your mattress).

But the tons of raw material as steel, or lead, or copper just sits there, and doesn't produce anything.  It'd be much better if you could buy something like a $265,000 CNC machine that could be sold in a year for $281,960, but also produced some widgets in the meantime to give additional income.

If you haven't guessed, I believe what you have invested in the S&P 500 and in Apple is analogous to the CNC machine.  The ownership percentage of factory, warehouse, railroad track that it represents will keep pace with inflation, and they'll continue to be used to create things, ship things, and store things.  Sometimes everyone is too excited about stocks, and sometimes they're too gloomy about stocks, so it's statistical.  I can't predict that next year everyone will be just as excited about things as they ices iare this year.  And because prn the short term are somewhat driven by excitement or gloominess, I can't guarantee the price will be reasonable.  It could be unreasonably low or unreasonably high!  But the math doesn't support paying off a 2.9% mortgage when inflation is running at 6.4%