Author Topic: Market Highs - Tempted to pay off mortgage  (Read 6312 times)

biscuitwhomper

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Market Highs - Tempted to pay off mortgage
« on: November 17, 2014, 09:29:25 AM »
I know this subject has been covered many times here.   To pay off ones mortgage or not, but this is a slightly different flavor.

I have to admit that today's market highs make me wonder if this is a good time to cash out some equities and pay off a 2.8% 15 year fixed, balance 140K.   I know...good rate.   Not because the market is at such a high, but because *why* the market is at a high - unprecedented trillions spent on propping up our economy via QE and ZIRP.   I just don't feel that my stock/bond portfolio is 'real'.    Going forward, a return of around 3% seems not too out of the question, at least for the mid-term.   In summary, my portfolio value feels quite artificial to me.

Has anyone been going through the same thought process?

Cheddar Stacker

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Re: Market Highs - Tempted to pay off mortgage
« Reply #1 on: November 17, 2014, 09:42:42 AM »
If you want to "sell high" go for it. But doing so does not necessarily mean you should pay off the mortgage, and I wouldn't. There are plenty ways to make your money make some money.

GGNoob

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Re: Market Highs - Tempted to pay off mortgage
« Reply #2 on: November 17, 2014, 10:31:46 AM »
So you would sell your stocks and pay off your mortgage, just to turn around and have more money to buy more stocks (at record highs) every month. To me, 2.8% is too good of a rate to pay off early. If you must sell stocks, maybe move some money to Lending Club. But don't pay off your house. But that's just me.

SunshineGirl

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Re: Market Highs - Tempted to pay off mortgage
« Reply #3 on: November 17, 2014, 10:57:10 AM »
You have to do what's going to allow you to sleep at night. I've been through a couple large market downturns, and it sucks to see your accumulated wealth decrease. Once your mortgage is paid off, if you keep investing, you will be dollar cost averaging additional money into the market, which is not a bad thing, and at that point, with the liability of your mortgage out of the way, dips in the market won't hurt quite so much.

Many people here will point out what you already know: you've got a great mortgage rate! But the truth is that none of us know what the economy is going to bring, and I think your reasoning is sound. It also (obviously) will decrease your monthly obligations to erase the mortgage payment.

Another approach would be to place a limit order on your stocks or ETFs to sell if the shares hit a certain (in your case lower) price. I don't think you can do this with a mutual fund, but there have been several times in my life when I've been glad I had those sell orders in place.

hodedofome

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Re: Market Highs - Tempted to pay off mortgage
« Reply #4 on: November 17, 2014, 11:02:59 AM »
Don't forget that your mortgage interest is tax deductible, so that's another advantage of having the mortgage there.

The market could return 1% over the next 10-15 years, or it could return 10%+. Nobody really knows.

GizmoTX

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Re: Market Highs - Tempted to pay off mortgage
« Reply #5 on: November 17, 2014, 11:09:38 AM »
"High-income taxpayers are also subject to limits on exemptions and deductions in 2013. The income threshold for the Pease and PEP (personal exemption phaseout) limitations is $300,000 in adjusted gross income (AGI) for joint filers and $250,000 for singles. The Pease limitation reduces the value of charitable contributions; mortgage interest; state, local, and property taxes; and miscellaneous itemized deductions. For 2013, this limitation is the lesser of 3% of AGI above the threshold up to 80% of the amount of the itemized deductions otherwise allowable. The PEP limitation reduces the total personal exemption by 2% for every $2,500 of income above the same income thresholds with no upper limitations. That means it's possible for some taxpayers to completely phase-out of their personal exemptions." -- from fidelity.com.

While this won't apply to most on this forum, it still is something to be aware of.

Dodge

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Re: Market Highs - Tempted to pay off mortgage
« Reply #6 on: November 17, 2014, 11:34:14 AM »

I know this subject has been covered many times here.   To pay off ones mortgage or not, but this is a slightly different flavor.

I have to admit that today's market highs make me wonder if this is a good time to cash out some equities and pay off a 2.8% 15 year fixed, balance 140K.   I know...good rate.   Not because the market is at such a high, but because *why* the market is at a high - unprecedented trillions spent on propping up our economy via QE and ZIRP.   I just don't feel that my stock/bond portfolio is 'real'.    Going forward, a return of around 3% seems not too out of the question, at least for the mid-term.   In summary, my portfolio value feels quite artificial to me.

Has anyone been going through the same thought process?

How much tax would you be paying after selling $140k of stocks/bonds to pay off the mortgage in one lump sum? If you have to sell $175k in order to get $140k after taxes, that might change your calculation.

milesdividendmd

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Re: Market Highs - Tempted to pay off mortgage
« Reply #7 on: November 17, 2014, 12:05:27 PM »
Warren Buffet ignores macro-economics and politics, and he's done pretty well.  Perhaps, you too should focus on variables that you have some control over, like savings percentage, asset allocation, and rebalancing at pre-determined intervals.

Basing your decision on quantitative easing seems like pretty thin ice for you to to be standing on.  Have you successfully  timed past market movements based on Fed policy?  If not, what makes you think your opinions on which way the market will move now have any credibility?

Plus let's say your worst fears come true and there is massive inflation which negatively impacts earnings growth, your cheap mortgage will only be all the more valuable for not having been paid off.  It is an amazing inflation hedge.  (at an inflation level of 3% it will have a continuous and positive effect on your real net worth even before tax deductions!)

Put me in the don't prepay your mortgage and keep on investing based on your basic (ie unchanging) strategy camp.  And I can't think of any scenarios where this is not the right advice, short of you are already independently wealthy and don't want to pay a  mortgage in retirement.  And even then you'd more often than not be wise to invest as much as possible and pay the mortgage.

waltworks

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Re: Market Highs - Tempted to pay off mortgage
« Reply #8 on: November 17, 2014, 12:28:08 PM »
Is 2.8% a return you're happy with? If so, by all means pay it off. It's a solid guaranteed... 2.8%.

I don't think a whole lot of people consider even a super-safe 2.8% a great return. That's below historical inflation levels and as such, pretty much free money. If you were at 4+%, or had some very short time horizon in which you were planning to sell the house or something, maybe it would make some sense. But honestly, no way.

-W

biscuitwhomper

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Re: Market Highs - Tempted to pay off mortgage
« Reply #9 on: November 17, 2014, 12:37:49 PM »
Don't forget that your mortgage interest is tax deductible, so that's another advantage of having the mortgage there.


True for many, but not me.    My expenses are not enough to surpass the standard deduction for my family.

biscuitwhomper

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Re: Market Highs - Tempted to pay off mortgage
« Reply #10 on: November 17, 2014, 12:42:51 PM »
Warren Buffet ignores macro-economics and politics, and he's done pretty well.  Perhaps, you too should focus on variables that you have some control over, like savings percentage, asset allocation, and rebalancing at pre-determined intervals.

Basing your decision on quantitative easing seems like pretty thin ice for you to to be standing on.  Have you successfully  timed past market movements based on Fed policy?  If not, what makes you think your opinions on which way the market will move now have any credibility?

Plus let's say your worst fears come true and there is massive inflation which negatively impacts earnings growth, your cheap mortgage will only be all the more valuable for not having been paid off.  It is an amazing inflation hedge.  (at an inflation level of 3% it will have a continuous and positive effect on your real net worth even before tax deductions!)



This has always been (and continues to be) my biggest argument for a mortgage, especially one at a low rate.   It is a wonderful inflation hedge.    Is inflation dead?   It sure seems that way, given the 'knows-no-bounds' intervention we have seen from central banks, but on the contrary, as soon as you hear people talking about something being 'dead', it isn't.  You articulate this well.
« Last Edit: November 17, 2014, 12:44:57 PM by biscuitwhomper »

nereo

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Re: Market Highs - Tempted to pay off mortgage
« Reply #11 on: November 17, 2014, 01:43:31 PM »
Quote
I have to admit that today's market highs make me wonder if this is a good time to cash out some equities and pay off a 2.8% 15 year fixed, balance 140K.   Not because the market is at such a high, but because *why* the market is at a high - unprecedented trillions spent on propping up our economy via QE and ZIRP.       Going forward, a return of around 3% seems not too out of the question, at least for the mid-term.   

Personally, I would absolutely NOT do this. 
First off, you state that 3% 'seems not too out of the question, at least for the mid-term".  Are you investing for the mid-term (whatever that is - I assume it's a couple of years)?  If so the move might make sense, but if you are investing for decades+ then it doesn't matter.

Second, when inflation kicks in again, having a 2.8% mortgage will be brilliant for your net worth.  After inflation you're already paying almost nothing for your mortgage beyond principle

third, QE has ended, and as-of-yet the sky hasn't fallen.  It could (nothing like it has been done before) but so far the doomsayers haven't gotten this call right.  SIRP is the exact reason you have such a low interest rate on your mortgage - why would you not continue to take advantage of that?



milesdividendmd

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Re: Market Highs - Tempted to pay off mortgage
« Reply #12 on: November 17, 2014, 02:26:44 PM »
Warren Buffet ignores macro-economics and politics, and he's done pretty well.  Perhaps, you too should focus on variables that you have some control over, like savings percentage, asset allocation, and rebalancing at pre-determined intervals.

Basing your decision on quantitative easing seems like pretty thin ice for you to to be standing on.  Have you successfully  timed past market movements based on Fed policy?  If not, what makes you think your opinions on which way the market will move now have any credibility?

Plus let's say your worst fears come true and there is massive inflation which negatively impacts earnings growth, your cheap mortgage will only be all the more valuable for not having been paid off.  It is an amazing inflation hedge.  (at an inflation level of 3% it will have a continuous and positive effect on your real net worth even before tax deductions!)



This has always been (and continues to be) my biggest argument for a mortgage, especially one at a low rate.   It is a wonderful inflation hedge.    Is inflation dead?   It sure seems that way, given the 'knows-no-bounds' intervention we have seen from central banks, but on the contrary, as soon as you hear people talking about something being 'dead', it isn't.  You articulate this well.

Thanks,  That's nice of you to say

I'm certainly no macroeconomist, though (as a lefty) I do thoroughly enjoy how often the inflation scolds' warnings have been flat out wrong in predicting the debasement of our currency in light of QE.  It appears that Krugman et al's predictive accuracy on the effect of central bank actions in the setting of a liquidity trap have been praise worthy to date.

It's incredible how well long term treasuries have performed in the past year, and If I'd changed my allocation based on the "debasement" argument last year I would have missed out on the fun (and wealth).

I make no bet either way.  But if I were making a bet, I would ignore the gold bugs, and pay attention to the Keynesians.

But I feel the smartest bet of all is just ignoring the noise and focusing on keeping it simple.  Which is never as easy as it sounds...

UnleashHell

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Re: Market Highs - Tempted to pay off mortgage
« Reply #13 on: November 17, 2014, 02:50:13 PM »
if you know that this is the market high and that its far wiser to pay of a cheap loan with the money then can I borrow your crystal ball for the lottery this weekend?




I understand the temptation to drop the loan amount but its a very risky call to be selling now in order to pay off a 2.8% fixed rate loan..  wasn't it a market high a couple of months ago... and a year ago and.....

NoraLenderbee

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Re: Market Highs - Tempted to pay off mortgage
« Reply #14 on: November 17, 2014, 04:55:52 PM »
We did this on a smaller scale earlier this year. Some of our stocks/funds were over our allocation, so we sold a bit. We also sold some stock from my previous employer (good riddance). We put 50K to our mortgage. It's a form of rebalancing that helps me sleep better.

tj

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Re: Market Highs - Tempted to pay off mortgage
« Reply #15 on: November 17, 2014, 05:49:30 PM »
I know this subject has been covered many times here.   To pay off ones mortgage or not, but this is a slightly different flavor.

I have to admit that today's market highs make me wonder if this is a good time to cash out some equities and pay off a 2.8% 15 year fixed, balance 140K.   I know...good rate.   Not because the market is at such a high, but because *why* the market is at a high - unprecedented trillions spent on propping up our economy via QE and ZIRP.   I just don't feel that my stock/bond portfolio is 'real'.    Going forward, a return of around 3% seems not too out of the question, at least for the mid-term.   In summary, my portfolio value feels quite artificial to me.

Has anyone been going through the same thought process?

I am not selling my shares ever. I'm assuming that today's values are quite low compared to, say, 30 years from now when I'll need the cash. I may be wrong. If you believe that markets are efficient, then the "propping up the market" is already baked into the cost.


http://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/

Radagast

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Re: Market Highs - Tempted to pay off mortgage
« Reply #16 on: November 17, 2014, 07:08:02 PM »
You could always value average, insisting on 7% increases in your investments.  Buy stocks when they return less than 7%, sell them and pay the mortgage when they exceed 7%.

surfhb

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Re: Market Highs - Tempted to pay off mortgage
« Reply #17 on: November 17, 2014, 08:39:51 PM »
I know this subject has been covered many times here.   To pay off ones mortgage or not, but this is a slightly different flavor.

I have to admit that today's market highs make me wonder if this is a good time to cash out some equities and pay off a 2.8% 15 year fixed, balance 140K.   I know...good rate.   Not because the market is at such a high, but because *why* the market is at a high - unprecedented trillions spent on propping up our economy via QE and ZIRP.   I just don't feel that my stock/bond portfolio is 'real'.    Going forward, a return of around 3% seems not too out of the question, at least for the mid-term.   In summary, my portfolio value feels quite artificial to me.

Has anyone been going through the same thought process?

Haven't we already proven time and time again that market timing is a losers game?  :)

StashDaddy

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Re: Market Highs - Tempted to pay off mortgage
« Reply #18 on: November 18, 2014, 07:20:12 AM »
We just paid off our house (3.5% interest rate).  It is quite nice to not have any outstanding debts now, and to be investing everything into the market with no fear of losing money (it is all excess retirement money for the future).  Market drop?  Thats ok, I'm still working--I don't need that money any time soon. 

However, in paying it off the last 2 years, we missed out on a pretty epic market run (doh!).  Like you, I thought the market had had a pretty good run, and was going to level out a bit.  I gambled, and lost.  But only hindsight is 20/20. 

Your interest rate is very low, but paying it off is better than investing in bonds right now (10-year bond yield is 2.3%), and is even less risky.  If your mortgage interest is enough to allow you to itemize your taxes and get the tax deduction, I definitely wouldn't pay it off.  If this is not the case, and you hate debt like I do, you could always just put some small % of your savings towards paying off the debt, and put the bulk into the market. 

nereo

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Re: Market Highs - Tempted to pay off mortgage
« Reply #19 on: November 18, 2014, 07:42:04 AM »
Quote
Your interest rate is very low, but paying it off is better than investing in bonds right now (10-year bond yield is 2.3%), and is even less risky.
How?  how is paying off your mortgage LESS risky than holding a 10-year US bond? 

StashDaddy

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Re: Market Highs - Tempted to pay off mortgage
« Reply #20 on: November 18, 2014, 07:47:49 AM »
Maybe I didn't work that correctly.  Perhaps its better to say:  "paying the 2.8% mortgage off currently yields higher than the 2.3% 10-year bond."