Author Topic: Mortgage Payoff vs Bonds  (Read 658 times)

surpasspro

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Mortgage Payoff vs Bonds
« on: August 27, 2020, 10:35:09 AM »
I have 4 years left on my $72k mortgage at a low 2.4% rate.  I'm fully invested in the market at 70% stocks, 23% bonds, rest cash plus my home.  My cash is earning me .80% and my bonds funds are earning around 1.25%.  I have some muni funds as well and factoring in taxes I'm barely hitting 2%.

The school of though with that low rate is just to invest more in the market.  The current stock markets seems fully valued right now and the fed isn't going to be raising rates anytime soon.  Would you sell some of my bond allocation and pay off the mortgage?  Thanks!
« Last Edit: August 29, 2020, 09:11:23 AM by surpasspro »

Paper Chaser

  • Bristles
  • ***
  • Posts: 462
Re: Mortgage Payoff vs Bonds
« Reply #1 on: August 27, 2020, 11:54:05 AM »
Close to retirement? I'd pay it off and be done. Still have a long time before you hit your number? I'd probably ride it out for a few more months at least

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 2548
Re: Mortgage Payoff vs Bonds
« Reply #2 on: August 27, 2020, 12:22:47 PM »
Yes you have negative leverage with the bonds and mortgage. Paying off a 2.4% mortgage is an awful thing to do, but here we are and you should do it (assuming no car loan, school loans, or credit card debt). With only 4y left on the mortgage there’s not much value left in the inflation hedge.


surpasspro

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Payoff vs Bonds
« Reply #3 on: August 27, 2020, 02:20:53 PM »
I'm 47 so I still have a ways until retirement.  No debt other than the mortgage.  Also not much of an interest deduction at this stage either. 

joleran

  • Bristles
  • ***
  • Posts: 337
Re: Mortgage Payoff vs Bonds
« Reply #4 on: August 28, 2020, 10:44:00 AM »
It's basically a guaranteed 2.4% return which is sadly good these days.  The main questions are liquidity and cash flows - extracting money out of your house isn't immediate unless you have a pre-existing HELOC set up, and reducing cash flow matters most regarding predicting investment outcomes in down markets.

I paid off my 3.75% mortgage in February of this year, back when 2-3% wasn't unachievable in very conservative bond funds.  I was 97% equities at that point and only in hindsight would it have been nice to have some more liquid holdings to "buy the dip".  Can't exactly argue too much though and it's certainly pleasant to see monthly expenditures lower then I've ever had since I started working.

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1649
  • Age: 48
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Mortgage Payoff vs Bonds
« Reply #5 on: August 28, 2020, 11:44:37 AM »
As far as munis go, I keep mine in closed end funds.  I have been in IQI and NEA since 2015.  They are currently yielding 4.77% and 4.56%, fed tax exempt.  These both held up very well during the COVID dip.  They have slowly bled off yield (I originally got almost 6% yield) as the shortest during bonds in the fund mature and have to be replaced with lower yielding debt.  But the NAV has climbed.  If you are holding individual bonds, switching to these would increase your diversification and yield to the point you are benefitting from the mortgage leverage. 

That said, I paid off my mortgage before putting a penny in the market (save what I could get a company 401k match on).  I never regretted that mathematically sub-optimal decision.  It sure feels good to own your home free and clear.  I sleep well at night.  And it gave me the courage to take on some riskier investments and learn options trading.  I never would have made the sort of early returns I did without the mortgage paid off b/c I never would have bet the "house money".  What I'm saying is, maximizing your lifetime earnings is not always the best choice, especially for a mustachian.  Do what maximizes  your lifetime happiness.

surpasspro

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Payoff vs Bonds
« Reply #6 on: August 29, 2020, 09:28:46 AM »
Thanks for the input.  Its a tough call.  With the fed basically saying they aren't raising rates for years I don't see yields going up any time soon.  Also muni markets are stressed now due to covid and cities' budget shortfalls.  I thought when the market dropped my muni funds wouldn't have been more stable, since in other down turns they held up better.  I hold VNYUX since i live in NY and VWALX.  VWALX factoring in state taxes, is a little more than my mortgage rate, but also riskier. 

At the end like @Financial.Velociraptor said it not always about the money and that feeling of owning something outright and being totally debt free also has a value.