Author Topic: Advice for a mortgage payoff fund in taxable account  (Read 3268 times)

Loud Noises

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Advice for a mortgage payoff fund in taxable account
« on: March 29, 2016, 09:19:48 AM »
Having just bought our first home, I've been reading all the threads in the payoff mortgage vs investing debate.  I've come to the conclusion that the best thing for our situation is to use a taxable account to send all extra "mortgage payments" and have it grow until it exceeds the mortgage balance.  At that point I can assess whether to payoff the mortgage or keep it.  My plan includes slightly more than a double payment each month to be sent to this account. 

My question is, where would you invest it?  My knee jerk points me toward VTI.  But is there a better risk/reward fund out there, given the purpose?  TD Ameritrade commission free ETFs are preferred here, but if it's offered commission free somewhere else, I'd happily open a new account. 

If it matters, our mortgage rate is 3.875% on a 30 year.  I would like to park these funds somewhere that beats that on a historical basis, for obvious reasons.  I kinda hope that there's some magical tax advantaged bond fund that pays a stable 4%, because I'd happily just send it there and forget about it.

(If it comes up: Yes, 401(k) and Roths are being taken care of with this plan.)

JPatch

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #1 on: March 29, 2016, 09:58:51 AM »
My kneejerk response is also VTI.  I like you idea here - pay extra on the mortgage, but the payment actually goes to an index fund that probably "outperforms" the early payment on the mortgage.

Highbeam

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #2 on: March 29, 2016, 11:08:54 AM »
I did the exact same thing. I opened an individual taxable account at vanguard and use 100% VTSAX to deposit my double mortgage payment. I picked a date that I wanted to have the payoff made, and funded the account with the amount necessary to equal the mortgage payoff amount on that date. Yes, you have to assume some sort of yield on the account. I chose 7%. You have to do some math so that you don't overfund the account. After it's funded you can stop your double mortgage payments.

I diverted what was my "double mortage payment" into maximizing my deferred accounts HSA, 457s, and IRAs to the max. Additional funds will be dumped into that taxable house account as they become available.

My 15 year mortgage is at 3.0% and I am already under the standard deduction so no write off on the interest anymore.

Strictly financially, I should have started with maximizing my tax deferred accounts and then funded my taxable house payoff account. It would have reduced my income taxes. I like and value locking in my house payoff amount.

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #3 on: March 29, 2016, 11:30:55 AM »
I have a fifteen year mortgage, which is about to be 3.1%.  I ran the investment calculator here. http://www.bankrate.com/calculators/retirement/investment-goal-calculator.aspx

And found that the delta between investing for a 6 year time horizon at 3.1% putting it into the mortgage vs 6% in the market taxable account was pretty limited after you factor in taxes etc.  For me it was something like $10k more in investments on that time horizon. 

Am I missing something?  Or is the delta just that small given the shorter time horizon?

Highbeam

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #4 on: March 29, 2016, 01:23:23 PM »
For me, dumping money into the mortgage meant that I did not have that money available to be used for a surprise cost or job loss situation where I would use it to pay the mortgage. Even if you pay off 95% of the mortgage balance you still have to make the full mortgage payment until you finish that last 5%. I found it more valuable to save up the payoff balance in a taxable account until I can kill the mortgage payment in one shot.

This in addition to the assumed higher returns from investing in VTSAX vs. a guaranteed 3% return with early mortgage payoff. 

Loud Noises

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #5 on: March 29, 2016, 03:46:34 PM »
Looks like Highbeam and I definitely have the same train of thought!  It's true that I would likely outperform slightly by being invested rather than prepaying, but that's not my true motivating factor.  If I start this process and have a big problem 4 years from now, I've paid 4 years of double payments but have no less pressure to come up with my regular monthly payment or lose (or sell) the house.  But even without the advantage due to investment gains, I would have 4 years of mortgage payments ready to go in this account.  Then I'll also worry less about a job loss or illness and feel less need for a oversized, yet under performing cash emergency fund.  This emerged (for me) as a win/win/win solution.  The absolute benefits of extra mortgage payments are only gained when it is completely paid off. 

In fact, I've decided that having this flexibility is even worth slightly under performing my mortgage rate if that were to happen.  Not likely, considering my 10 year time horizon, but certainly possible.  8% returns?  #*$@ yeah.  2% returns?  I'm still happy, because I'm flexible. 

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #6 on: March 29, 2016, 03:59:37 PM »
Its a really good thought, and appreciate you posting this idea. I think I am still going to do a hybrid of this plan. Keep a decent sized cash fund. Split my extra cash between investments and putting it on the mortgage. Maybe my way of diversifying or hedging against any of the potential risks.  Totally see the value in investing it all though, and either way we all will be getting there sooner rather than later, right?

Highbeam

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #7 on: March 29, 2016, 04:13:37 PM »
Looks like Highbeam and I definitely have the same train of thought!  It's true that I would likely outperform slightly by being invested rather than prepaying, but that's not my true motivating factor.  If I start this process and have a big problem 4 years from now, I've paid 4 years of double payments but have no less pressure to come up with my regular monthly payment or lose (or sell) the house.  But even without the advantage due to investment gains, I would have 4 years of mortgage payments ready to go in this account.  Then I'll also worry less about a job loss or illness and feel less need for a oversized, yet under performing cash emergency fund.  This emerged (for me) as a win/win/win solution.  The absolute benefits of extra mortgage payments are only gained when it is completely paid off. 

In fact, I've decided that having this flexibility is even worth slightly under performing my mortgage rate if that were to happen.  Not likely, considering my 10 year time horizon, but certainly possible.  8% returns?  #*$@ yeah.  2% returns?  I'm still happy, because I'm flexible.

Thank you for more clearly saying this than I could. Liquidity is the principle at play here.

The real hard decision comes when you have enough saved to pay off the mortgage in one shot, thereby eliminating the mortgage payment, but want to keep making 8%.


forummm

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Re: Advice for a mortgage payoff fund in taxable account
« Reply #8 on: March 29, 2016, 04:53:21 PM »
Looks like Highbeam and I definitely have the same train of thought!  It's true that I would likely outperform slightly by being invested rather than prepaying, but that's not my true motivating factor.  If I start this process and have a big problem 4 years from now, I've paid 4 years of double payments but have no less pressure to come up with my regular monthly payment or lose (or sell) the house.  But even without the advantage due to investment gains, I would have 4 years of mortgage payments ready to go in this account.  Then I'll also worry less about a job loss or illness and feel less need for a oversized, yet under performing cash emergency fund.  This emerged (for me) as a win/win/win solution.  The absolute benefits of extra mortgage payments are only gained when it is completely paid off. 

In fact, I've decided that having this flexibility is even worth slightly under performing my mortgage rate if that were to happen.  Not likely, considering my 10 year time horizon, but certainly possible.  8% returns?  #*$@ yeah.  2% returns?  I'm still happy, because I'm flexible.

Thank you for more clearly saying this than I could. Liquidity is the principle at play here.

The real hard decision comes when you have enough saved to pay off the mortgage in one shot, thereby eliminating the mortgage payment, but want to keep making 8%.

And don't want to pay taxes on the capital gains.