Author Topic: Getting ready to pay off the mortgage (I think)  (Read 6888 times)

OzzieandHarriet

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Getting ready to pay off the mortgage (I think)
« on: October 21, 2017, 10:45:42 AM »
Circumstances: married couple, no kids, I'm 60, husband is 58; I'm working part time, SE (earning very little), and he is full time, long-term steady professional job. Only debt is mortgage. Four years ago, we sold an investment property and put the proceeds into a Vanguard fund, to which we add $1,000/month. We also fully fund his 401k and our Roths. I have a 401k from my old job that has been doing pretty well. The Vanguard fund currently has enough in it to pay off our mortgage with a couple years' living expenses left over. I've been increasingly worried about the stock market because it has risen so high, and according to all the experts (including MMM) is due for a correction anytime now. We are thinking that if we pay off the mortgage that will (a) lock in however much that fund has earned on that money and (b) position us to have lower costs when husband retires in a couple of years. And of course we will save the difference in our expenses, at least until then.

Total net worth is >$2 million, not including the house.

Any thoughts on this?

sokoloff

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Re: Getting ready to pay off the mortgage (I think)
« Reply #1 on: October 21, 2017, 10:55:44 AM »
At its essence, in pure finance terms, your question is market timing dressed up in a different costume.

If you believe that market timing is a +EV game, then you could do it on a financial basis. I believe that market timing is generally a -EV game, so try to avoid it.

On a psychological basis, having a paid off mortgage is worth a lot of peace of mind to some people. If you find yourself to be one of those people, or if you have reached the point where you have more money than you could possibly need and value certainty a lot, then the fact that market timing is -EV might be over-shadowed by the fact that your personal utility function is more steeply sloped than others (that a future loss is more damaging than an equal sized future gain).

You can do it, but if you do, I hope you're doing it for psychological reasons (not a bad thing) not math reasons.

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #2 on: October 21, 2017, 11:05:08 AM »
Couldn't it be thought of as a way of rebalancing a smallish percentage of total investments while stock prices are so high? Everything else is in moderately aggressive funds.

nereo

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Re: Getting ready to pay off the mortgage (I think)
« Reply #3 on: October 21, 2017, 11:21:03 AM »
sokoloff is right inasmuch as what you are doing is market timing.
More to the point, you would be eliminating a (presumably) low-interest debt with money taken from your investment accounts.

Before you do this, there are a few things to be aware of. 
1) a fixed rate mortgage is a fantastic hedge against inflation. Currently we have had ultra-low inflation rates for the past few decades, but that could change. Consider how your investment strategy would respond to inflation in the 3-5% range (historically more typical). Also worth noting that we've had quarters of 8-12% inflation  within the last 50 years.

2) Do you claim your mortgage deduction on your taxes, and could you in future years?

3) ultimately by deciding to pay off the mortgage you are choosing to have less money but also less debt.  Since you are concerned with future market performance, take your current mortgage rate and subtract the expected inflation rate (current fed target is 2%).  For exmaple, 4% mortgage  - 2% future inflation  = 2%. In order for paying off the mortgage to be "worth" it, your investments will need to earn less than 2% (real adjusted returns) including dividends over the duration of your remaining mortgage term minus any benefit you get from a tax write-off.  For dividend yields, consider that the SP500 is currently almost 2% (1.92% right now).

Put another way, if you have another 10 years on your mortgage, it isn't whether the market will drop this year or next that matters, but rather whether you expect the market to have gained at least 2%/year after dividends a decade from now (i.e. the end of your term).


foghorn

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Re: Getting ready to pay off the mortgage (I think)
« Reply #4 on: October 21, 2017, 11:27:58 AM »
My two cents worth, from my own experience. 

In 2006 I was in a similar situation (but 39 years old at the time).  I had enough cash sitting around to pay off the mortgage and did so.  Had I taken that money and invested it instead of paying off the mortgage, I would have likely lost much of it when the great recession hit a couple of years later.  I will NOT tell you that I was smart enough to see the recession coming, I got lucky by using that money in the way that I did. 

I have never regretted the decision to pay off the mortgage, but I believe that feeling is more emotional than rational.  I simply liked the idea of being debt free.  The freedom that being debt free allowed me was terrific.  I was able to take a few risks that I would not have taken otherwise (quit my job and move to a new city while paying cash for my new home in that city). 

The most important thing I think you can do is to save/invest what had been the house payment once you pay off the house.  You have already stated that would do this - so good for you.  A bad choice would be treating the old house payment as "fun money" to be blown.  You will love seeing your bank balance go up every month too.

I hope this perspective is helpful.  Good luck, you are in a good position to even have the option to pay off the mortgage.


MDM

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Re: Getting ready to pay off the mortgage (I think)
« Reply #5 on: October 21, 2017, 01:25:58 PM »
...according to all the experts (including MMM) is due for a correction anytime now.
...
Any thoughts on this?
There are plenty of "should I pay off my mortgage?" threads, so I'll just say there are plenty of "should I pay off my mortgage?" threads.

As for expert opinions, see Swedroe: ‘Sure Things’ Check-In | ETF.com.

Mr. Boh

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Re: Getting ready to pay off the mortgage (I think)
« Reply #6 on: October 21, 2017, 01:49:56 PM »
Prepare for a lot of opinionated posts from people who think that paying off your mortgage is the worst thing you could possibly do. These posts are almost always from people who are in the accumulation stage. It is also important to note that every situation is different so there is no one size fits all prescription, contrary to what some here seem to believe.

In view of your net worth and your age I think it is perfectly reasonable to view paying off your mortgage as rebalancing. It is my opinion that removing your mortgage is very similar to a bond that pays you what you would have spent on your monthly payment.

A little more information might be helpful for us. You state that your investments consist of "moderately aggressive funds". Do you know the total percentage of stocks and bonds in your entire portfolio? What is the value of your house and the terms and balances on your mortgage? How much longer do you and your husband plan on working.

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #7 on: October 21, 2017, 03:29:20 PM »
I know there are a lot of these threads -- have read some of them but most don't apply in our situation. FWIW, MMM in a recent blog post mentioned paying off one's mortgage as a way to prepare for the inevitable recession.

We're also worried about the fact that the country is being run by crazy incompetent people who seem intent on destroying the government, so there's that. How is all this instability going to affect the economy going forward? Maybe this is just rearranging deck chairs on the Titanic, but it's something.

Mr. Boh, that's kind of what I thought (i.e., that payoff would be roughly equivalent to shifting that money into a bond fund). Our overall investments are approximately 65% stocks. We have about 16 years left on the current 20-year loan at 3.875. I don't know that the specific values really matter; let's just say that the house has appreciated nicely over the almost 20 years we've owned it, and the neighborhood is good and in demand.

My opinion is that paying this loan off now will be a wash financially, but it will be a way to cash in gains made on that money to date. I did run an online calculator with the result that we'd be about $50k ahead paying off the loan and investing the difference for the next 16 years. We will be well into old age by then, so we may be more in spending mode at that point anyway.

sokoloff

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Re: Getting ready to pay off the mortgage (I think)
« Reply #8 on: October 21, 2017, 03:44:31 PM »
I did run an online calculator with the result that we'd be about $50k ahead paying off the loan and investing the difference for the next 16 years.
That would seem to require an estimation of investment gains to be under your mortgage interest rate, which then depends on what the counter-factual investments would have been. If you're pulling money out of money market or T-bills to pay the mortgage, paying the mortgage and investing the difference comes out ahead. For most anything else, it's more likely that the online calculator overlooked something than paying off a tax-advantaged 3.875% loan with investments and then investing the difference will come out ahead.

nereo

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Re: Getting ready to pay off the mortgage (I think)
« Reply #9 on: October 21, 2017, 03:46:51 PM »
...

Mr. Boh, that's kind of what I thought (i.e., that payoff would be roughly equivalent to shifting that money into a bond fund). Our overall investments are approximately 65% stocks. We have about 16 years left on the current 20-year loan at 3.875. I don't know that the specific values really matter; let's just say that the house has appreciated nicely over the almost 20 years we've owned it, and the neighborhood is good and in demand.

My opinion is that paying this loan off now will be a wash financially, but it will be a way to cash in gains made on that money to date. I did run an online calculator with the result that we'd be about $50k ahead paying off the loan and investing the difference for the next 16 years. We will be well into old age by then, so we may be more in spending mode at that point anyway.

another question to ask yourself is what percentage of your total portfolio are you comfortable having as your home?  By selling assets to pay off your mortgage you will be altering your asset allocation (AA).  If the final numbers are ok with you - great.  But you mentioned that you are roughly 65% stocks.  Where will should you pay it off?  50%? 40%?  As mentioned earlier you could consider this a sort of rebalancing, but are you comfortable to what you are rebalancing to?

Quote
We're also worried about the fact that the country is being run by crazy incompetent people who seem intent on destroying the government, so there's that. How is all this instability going to affect the economy going forward? Maybe this is just rearranging deck chairs on the Titanic, but it's something.

Given the above, here's a tought experiment for you.  Going foward which is more valuable to you - more money held in stocks or less money overall, more money tied to your house and lower expenses overall?
Is the current 'instability' (to use your word) going to lead to inflation? the stock market tanking? (or both?)  Will we return to our sanity in 16 years, or is this all over?  I try not to get caught up in things outside my sphere of control and recognize that we've survived world wars and market crashes before, and have so far always come back.  how you view those questions will frame your decision.  Just remember that trying to time the market rarely works out, particularly over multi-year timeframes.

MrThatsDifferent

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Re: Getting ready to pay off the mortgage (I think)
« Reply #10 on: October 21, 2017, 11:52:36 PM »
You’re at retirement age and you have over $2m.  You could put $500k to your mortgage and still draw 4% from your remainder for $60k/yr to live off. We’d need your annual expenses and mortgage amount to be more specific but I think you’d be ok.

Car Jack

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Re: Getting ready to pay off the mortgage (I think)
« Reply #11 on: October 22, 2017, 11:03:20 AM »
I think a lot of this is perspective.  A thirty-something might think about his own future and how he's got all these years of gain ahead of him.  He's got little saved and invested and needs to squeeze every avenue for money to put into the market.

Coming from your age group (I'm 60) and nearness to potential retirement and with $2M in investments, I'm going to say that I would absolutely pull investment money out and put it into paying off the mortgage.  This locks in your gains and uses them to pay off a debt.  I'll also let you know that indeed, that mortgage money that you're not paying will make it feel much easier to afford to do whatever you want, be that retiring, buying a GT-R, going out to eat more, investing more monthly, taking a vacation......whatever.  I paid my mortgage off about 15 years ago and indeed it freed up a lot for my wife, me and my 2 kids. 

Mr. Boh

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Re: Getting ready to pay off the mortgage (I think)
« Reply #12 on: October 22, 2017, 11:30:11 AM »
Asset allocation is all about your risk tolerance. It sounds like the amount of risk you are comfortable with has changed. That seems reasonable to me because as you age your asset allocation is supposed to become less risky. Although others could see your situation as market timing, it seems to me it can be justified as adjusting your allocation. I was only asking about the value of your home and remaining loan amount so that you could get a good idea of the proportions of stocks, bonds and RI as a percentage of your entire net worth. Just make sure that after you rebalance your assets are not lopsided. Also keep in mind that bonds are not without risks of their own.

On the whole you are in great financial shape. You have been doing all the right things so whatever makes you feel the most comfortable is probably the right thing to do.

talltexan

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Re: Getting ready to pay off the mortgage (I think)
« Reply #13 on: October 23, 2017, 07:25:38 AM »
We're also worried about the fact that the country is being run by crazy incompetent people who seem intent on destroying the government, so there's that. How is all this instability going to affect the economy going forward? Maybe this is just rearranging deck chairs on the Titanic, but it's something.

A lot of people use this line of reasoning to defend a prediction that the stock market will drop.

But crazy, incompetent governments have a history of provoking high inflation. You're going to want to have a mortgage and more stock market exposure if that happens.

I'm a red panda

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Re: Getting ready to pay off the mortgage (I think)
« Reply #14 on: October 23, 2017, 08:54:58 AM »
I've been increasingly worried about the stock market because it has risen so high, and according to all the experts (including MMM) is due for a correction anytime now.

I don't think MMM has said we are due for a correction "anytime now".
If you are referring to this article: http://www.mrmoneymustache.com/2017/06/20/next-recession/  it is clear he is saying you can not predict the next recession, just that there will be another one eventually- there always is.  The post is about always being prepared for a recession, not that he is predicted one.

If he said it elsewhere, sorry- I didn't see it, my apologies for the post.

gluskap

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Re: Getting ready to pay off the mortgage (I think)
« Reply #15 on: October 27, 2017, 05:01:03 PM »
To me the best compromise is to have a paid off house right when you retire.  So what I would do is slowly pay more towards your mortgage each month until it's paid off when you retire.  That way you are kind of DCA into your new asset allocation and less market timing.  I like the idea of a paid off mortgage when retired because it lowers your expenses and you can be in a lower tax bracket.  Also it's nice to still have the interest rate deduction when you have higher income and are still working.

TomTX

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Re: Getting ready to pay off the mortgage (I think)
« Reply #16 on: October 27, 2017, 05:10:20 PM »
My two cents worth, from my own experience. 

In 2006 I was in a similar situation (but 39 years old at the time).  I had enough cash sitting around to pay off the mortgage and did so.  Had I taken that money and invested it instead of paying off the mortgage, I would have likely lost much of it when the great recession hit a couple of years later.  I will NOT tell you that I was smart enough to see the recession coming, I got lucky by using that money in the way that I did. 

You only would have "lost" it if you panicked and sold at the bottom.

If you had invested in the S&P500 and stuck with it through today you would have roughly doubled the share price, plus an extra ~20% from dividends.

Unless you had a really terrible rate on your mortgage - you would be better off today if you had NOT paid off the mortgage.

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #17 on: November 03, 2017, 07:40:33 PM »
Haven't done anything about this yet. I started wondering what our capital gains tax would be when we pulled the money out of the investment. This may be a dumb question, but is there a way to figure out a ballpark estimate?

MDM

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Re: Getting ready to pay off the mortgage (I think)
« Reply #18 on: November 03, 2017, 08:15:26 PM »
Haven't done anything about this yet. I started wondering what our capital gains tax would be when we pulled the money out of the investment. This may be a dumb question, but is there a way to figure out a ballpark estimate?
The "what if?" worksheets of TurboTax, TaxAct, etc. or the case study spreadsheet might be useful.

You do need to know the basis of your investments in order to calculate the tax.  E.g., "withdrawing $20K" is not sufficient information: if the basis is, say, $7500, your capital gain is $12,500; if the basis is $18,623 your capital gain is $1,377, etc.

sokoloff

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Re: Getting ready to pay off the mortgage (I think)
« Reply #19 on: November 04, 2017, 06:30:37 AM »
Haven't done anything about this yet. I started wondering what our capital gains tax would be when we pulled the money out of the investment. This may be a dumb question, but is there a way to figure out a ballpark estimate?
If your assets are held at an online brokerage, see if there's a way to find "unrealized gains", ideally broken down by short and long-term.

Vanguard has it on a "cost basis" tab, Etrade calls it "Total Gain" in the Portfolio view (shows it per lot, but doesn't break it down by long vs short term for unrealized gains, though you can do it manually easily enough).

Then, to ballpark it, take your marginal long-term capital gains rate and multiply by the unrealized long-term gain, marginal short-term rate times unrealized short-term gain and add them. That will get you close; to get it perfect, you'll need to scenario plan in tax software or pencil/paper. (To me, ballpark means "within $10K or within 25%, whichever is greater"; others might want a smaller ballpark.)

Retire-Canada

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Re: Getting ready to pay off the mortgage (I think)
« Reply #20 on: November 04, 2017, 06:53:18 PM »
OP what is your international stock allocation like? Do you have any? If you feel like the US market is overvalued you could move some funds to international stocks to "cash in on the gains" while still enjoying the growth of stocks in general.

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #21 on: November 05, 2017, 11:12:00 AM »
Also thinking that this will bump up our income for the year too much and we'll get hit with that, too. AGI last year was about $130k, will probably be a bit more this year and next because of my part-time job. All in all, it may be that it's best to continue to pay off per the original schedule and let it ride a while longer.

KodeBlue

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Re: Getting ready to pay off the mortgage (I think)
« Reply #22 on: November 06, 2017, 07:57:26 AM »
I'll just say we paid off our mortgage about 18 months ago, have yet to regret it.

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #23 on: December 29, 2017, 07:59:27 AM »
We decided to pull the plug! Transferred the funds and will pay it off next week.

t185

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Re: Getting ready to pay off the mortgage (I think)
« Reply #24 on: December 30, 2017, 03:37:17 AM »
We decided to pull the plug! Transferred the funds and will pay it off next week.

Good choice!

Paid mine off two years ago and it is a great feeling not having a mortgage

OzzieandHarriet

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Re: Getting ready to pay off the mortgage (I think)
« Reply #25 on: January 03, 2018, 02:30:07 PM »
And done! Telling you people because I feel like I have to tell somebody!

Financial.Velociraptor

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Re: Getting ready to pay off the mortgage (I think)
« Reply #26 on: January 03, 2018, 03:53:28 PM »
And done! Telling you people because I feel like I have to tell somebody!

W00t!  I never regretted paying mine off early.

SwordGuy

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Re: Getting ready to pay off the mortgage (I think)
« Reply #27 on: January 03, 2018, 05:13:41 PM »
In 2006 I was in a similar situation (but 39 years old at the time).  I had enough cash sitting around to pay off the mortgage and did so.  Had I taken that money and invested it instead of paying off the mortgage, I would have likely lost much of it when the great recession hit a couple of years later.  I will NOT tell you that I was smart enough to see the recession coming, I got lucky by using that money in the way that I did. 


Sounds really awesome.

Shame it's a bad conclusion.

If you had a broad-based index fund that held your stock market investments, you would not have lost a dime when the great recession hit -- unless you sold your shares after the value went down.

If you had held onto the stocks, you would have made more money.

Retire-Canada

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Re: Getting ready to pay off the mortgage (I think)
« Reply #28 on: January 03, 2018, 05:42:22 PM »
If you had held onto the stocks, you would have made more money.

A lot more money.

talltexan

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Re: Getting ready to pay off the mortgage (I think)
« Reply #29 on: January 04, 2018, 08:26:05 AM »
But how can you know how you would have responded to the selloff in late 2008? What if the stress of having a mortgage would have made you more likely to cash out near the bottom?

Retire-Canada

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Re: Getting ready to pay off the mortgage (I think)
« Reply #30 on: January 04, 2018, 08:36:00 AM »
But how can you know how you would have responded to the selloff in late 2008? What if the stress of having a mortgage would have made you more likely to cash out near the bottom?

I lived through the tech bubble and 2008 so I know how I responded [didn't sell anything].

MustacheAndaHalf

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Re: Getting ready to pay off the mortgage (I think)
« Reply #31 on: January 04, 2018, 09:35:26 AM »
You can't predict a market correction, but you can turn that nervous energy into a checkup on your portfolio.  With 35% bonds, and close to retirement, I assume your goal is 40% bonds?  Just make sure you keep on track with that, re-balancing once a year back to your intended allocation.

One change compared to past mortgage threads: pending legislation aims to eliminate the mortgage interest deduction.  By removing one benefit of making payments on a mortgage, that law will shift the decision towards paying off a mortgage (slightly).  Based on past data, I believe the stock market will average more than 4%/year over the ~15 year time frame of this mortgage, but there is peace of mind in having no bank owing part of your house.

nereo

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Re: Getting ready to pay off the mortgage (I think)
« Reply #32 on: January 04, 2018, 09:47:19 AM »
You can't predict a market correction, but you can turn that nervous energy into a checkup on your portfolio.  With 35% bonds, and close to retirement, I assume your goal is 40% bonds?  Just make sure you keep on track with that, re-balancing once a year back to your intended allocation.

One change compared to past mortgage threads: pending legislation aims to eliminate the mortgage interest deduction.  By removing one benefit of making payments on a mortgage, that law will shift the decision towards paying off a mortgage (slightly).  Based on past data, I believe the stock market will average more than 4%/year over the ~15 year time frame of this mortgage, but there is peace of mind in having no bank owing part of your house.

I don't disagree with what you said up until the last sentence.  Why do people say there is piece of mind not having a mortgage when compared to having more money invested? I still do not understand that sentiment - you are still responsible for paying taxes and insurance (TI) which over time exceed the initial PI payments.  I've never once been concerned that the bank owns part of my house - the bank has demanded to crash on my couch nor told me what I could or couldn't do here (that's largely limited by my insurance coverage and muni regulations).