Whew, just caught up on this incredibly long thread, glad it's been revived. I'm interested to get some anonymous (maybe even poo-flinging) expert advice on our plan.
We're 2.5 years into our mortgage, we've just begun aggressively pre-paying.
Starting balance 360K
Current Balance 297K
Interest Rate 3.725%
This year, and for at least the next 3 years we're expecting our income to stay way higher than it has been(750k+). This is high enough that we could cash-flow paying this balance by the end of 2016 while still maxing our 401ks. We're well on our way to being FI, but not planning to retire as soon as we hit our number because we're still pretty young (both < 35).
Some more pertinent facts:
- We have 6+ months in cash for emergencies and quite a bit in taxable accounts in case things go very bad
- We don't plan on living in this house for 27.5 more years, 10 more seems like the maximum.
- We've put enough into our kids (~6 months and ~2.5 yrs) 529s that we expect them to grow to the appropriate size once they get to the right age.
- We've been investing about $2,000/week into our taxable account with Vanguard (VTSAX).
- We're trying to keep our asset allocation with at least 10% bonds so we have some ability to adjust with market changes.
We recently crossed over 90% equity, so I started looking at my options. I could convert equity funds into bond funds in our tax-sheltered accounts (39.6% marginal bracket is rough on interest), or start directing some of the excess cashflow to purchasing bonds. However, VBTLX is yielding around 2.2%, well under interest rate. Putting more money here seems like a bad move when the rate is lower than our mortgage interest rate. If we consider the mortgage a "negative bond" we're skewed even further toward equities than our numbers suggest.
We could just keep cash in a money market account and pay it off in a lump sum, but instead I'm looking at using this approach.
- Continue maxing tax-advantages accounts.
- Add 20,000 prepayment to the mortgage each month.
- If the market takes a dive, return to DCA into equities to return to the 90/10 allocation.
Doing this will let us remain flexible (it's not an all-or-nothing pay off) and gives us some guide rails that will let us alter course to take advantage of a market downturn.
The big downsides I see are:
- We're losing about 12k in mortgage interest deduction (which equates to around 4,750/year in tax savings).
- The house will be around 30% of our assets once it's paid off, that's a pretty significant chunk.
- Depending on how the next 10 years go for equities, we could do a lot better by putting 300K there than 3.725% (or we could do a lot worse).
So is this a bad plan? I'm sure someone thinks I should go buy 20 leveraged rentals and call it good and others will ask why I'm not retired yet, but it's the kind of real-life scenario that people in this thread have been discussing that isn't quite as simple as the math indicates.