Author Topic: What would you do? (home payoff vs. bulkup savings vs. both)  (Read 10390 times)

hobbes1

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What would you do? (home payoff vs. bulkup savings vs. both)
« on: September 30, 2014, 11:33:57 AM »
Curious what other might do in our shoes. My wife and I are both currently in full time jobs. Combined income around $160,000/year gross (USD) and the bulk of that is my income. Debt = $112k USD on mortgage @3.75%, 30 year loan. NO other debt at all. We have been in the process of streamlining our expenses, cutting out the fat, avoiding debt, etc. for awhile now. Current savings/investments ~$430k USD, mix bond funds and ETFs which have a cumulative yield of just over ~4% APY.

Worries: the job market in my profession has gotten very tight and I may find myself out of a job in <5-10 years (assuming I can't FIRE first :) but realistically, I could be ousted much sooner, simply becuase of market pressures within the profession (lots more supply than demand).

Would you:

a) focus on paying off your house as fast as possible?
b) focus on making the standard mortgage payment every month while maximizing investments and at such time as you get to where you have X amount of money saved, pay the house off in one fell swoop, and either work until the job goes away (if it does) or work until you feel like FIREing?
c) some combination of A and B?
d) something completely different?

Thanks

Cheddar Stacker

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #1 on: September 30, 2014, 11:46:30 AM »
D, something completely different.

I like debt, particularly sub 4% mortgage debt. I would pay the minimum on that debt every month and invest every extra dollar. I would start by maxing out every tax advantaged space I could find, then put the balance into taxable investments. If you lose your job, you're safer with a $80K mortgage and $40K in taxable investments than you are with a $40K mortgage and $0 in taxable investments.

I'm apparently in the minority here though as evidenced by this.

Either way, it sounds like you're on the right track. Read through that link above. There are a lot of great arguments on both sides, links to various other threads on the subject, links to insightful articles written on the topic, and some healthy banter. Good luck.

GGNoob

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #2 on: September 30, 2014, 12:12:12 PM »
D, something completely different.

I like debt, particularly sub 4% mortgage debt. I would pay the minimum on that debt every month and invest every extra dollar. I would start by maxing out every tax advantaged space I could find, then put the balance into taxable investments. If you lose your job, you're safer with a $80K mortgage and $40K in taxable investments than you are with a $40K mortgage and $0 in taxable investments.

I'm apparently in the minority here though as evidenced by this.

Either way, it sounds like you're on the right track. Read through that link above. There are a lot of great arguments on both sides, links to various other threads on the subject, links to insightful articles written on the topic, and some healthy banter. Good luck.

+1

This is how I've always looked at it. I'd rather have money saved up than a low interest debt paid off.

frizzywhiskers

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #3 on: September 30, 2014, 12:15:02 PM »
I am in a similar situation as you.  High dual income, only mortgage debt, similar amount in investments and hoping to retire in less than 10 years.  We are focussing on paying off the mortgage as fast as we can.  Our mortgage amount is much bigger though.  Can't wait for the day to be able to choose a lesser paying job if i want and to be free!  We are still investing at the same time but only about 15% of our income.  Once mortgage free we will up our investments to about 50%.

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PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #5 on: September 30, 2014, 02:13:29 PM »
Something completely different:

Sell your bond funds and buy equity index funds from the proceeds.
You can sell the bond funds over time and prepay the mortgage by the same amount every month or so.
I assume that you are holding bond funds to decrease volatility and do not want to sell them all at once (which is what i would do).
By prepaying the mortgage by the same amount that you have in dead weight bond funds right now, volatility will be the same with more invested in equities and less interest paid.


hobbes1

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #6 on: September 30, 2014, 02:51:10 PM »
@PeteD01: Thank you for your thoughts. We are happy with our mix of bond funds and non-bond ETFs. these funds not only have gained this year but are also yielding interest and dividend payments regularly. While we will likely buy into SP500 index fund later, we have no plans to change our current holdings. We understand about trying to time the market, etc.

Eventually, we will have enough savings in these funds that we will supplement and/or live off of the interest/dividends with minimal need to sell the actual funds. When we are rocking about $30k/year in interest/dividends and no mortgage, we will be essentially free to quit our FT jobs and either FIRE or choose to work part time at lower paying but more interesting/rewarding jobs. That is the plan anyway. A major factor for us, for our plan, is to be debt free entirely. I am in my late 40s now and hope to get where we are going in the next 5 years or so.

so...per the OP...my wife and I are debating paying off the mortgage now over a couple of years (while still being able to nearly max 401k, getting the company match as well as my company has a company funded pension and fund Roth IRAs and contribute to my wifes retirement plan) so that we might be ready if I get canned unexpectedly. OR, keep chipping away at a slower pace while banking/investing that money that would otherwise go to the mortgage and if jobs hold out for a few years, paying the house off in one cheque and bailing out of the FT jobs as above....


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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #7 on: September 30, 2014, 02:59:52 PM »
D, something completely different.

I like debt, particularly sub 4% mortgage debt. I would pay the minimum on that debt every month and invest every extra dollar. I would start by maxing out every tax advantaged space I could find, then put the balance into taxable investments. If you lose your job, you're safer with a $80K mortgage and $40K in taxable investments than you are with a $40K mortgage and $0 in taxable investments.

I'm apparently in the minority here though as evidenced by this.

Either way, it sounds like you're on the right track. Read through that link above. There are a lot of great arguments on both sides, links to various other threads on the subject, links to insightful articles written on the topic, and some healthy banter. Good luck.

+2

PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #8 on: September 30, 2014, 04:52:27 PM »
@PeteD01: Thank you for your thoughts. We are happy with our mix of bond funds and non-bond ETFs. these funds not only have gained this year but are also yielding interest and dividend payments regularly. While we will likely buy into SP500 index fund later, we have no plans to change our current holdings. We understand about trying to time the market, etc.

Eventually, we will have enough savings in these funds that we will supplement and/or live off of the interest/dividends with minimal need to sell the actual funds. When we are rocking about $30k/year in interest/dividends and no mortgage, we will be essentially free to quit our FT jobs and either FIRE or choose to work part time at lower paying but more interesting/rewarding jobs. That is the plan anyway. A major factor for us, for our plan, is to be debt free entirely. I am in my late 40s now and hope to get where we are going in the next 5 years or so.

so...per the OP...my wife and I are debating paying off the mortgage now over a couple of years (while still being able to nearly max 401k, getting the company match as well as my company has a company funded pension and fund Roth IRAs and contribute to my wifes retirement plan) so that we might be ready if I get canned unexpectedly. OR, keep chipping away at a slower pace while banking/investing that money that would otherwise go to the mortgage and if jobs hold out for a few years, paying the house off in one cheque and bailing out of the FT jobs as above....

If your goal is to be debt free you should pay down your debt.
If your goal is to financially optimize, you should divest yourself from leveraged investments in bond funds. I'm not sure that you understand why I am saying that you should sell your bond funds and pay your mortgage instead. The point is that there is no point in carrying mortgage debt in order to be invested in bond funds - you are carrying excess risk while losing money doing it.
On second thought you might be better off just paying off the mortgage and educate yourself about the fallacy of looking only at yield - you may find some surprises there.

ltt

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #9 on: September 30, 2014, 05:28:57 PM »
People like to compute all the numbers, but the plain and simple fact of the matter is that it is extremely "freeing" not to have to make a mortgage payment.  Yes, you will have homeowners insurance and property taxes to pay, but you never have to write another check to the bank, if you don't want to. 

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #10 on: September 30, 2014, 06:01:17 PM »
D, something completely different.

I like debt, particularly sub 4% mortgage debt. I would pay the minimum on that debt every month and invest every extra dollar. I would start by maxing out every tax advantaged space I could find, then put the balance into taxable investments. If you lose your job, you're safer with a $80K mortgage and $40K in taxable investments than you are with a $40K mortgage and $0 in taxable investments.


I would go with "D+" - a variant on Cheddar Stacker's plan.  Basically do what he said (pay the minimum on the mortgage and invest the difference in tax-advantaged accounts), but with a twist of wringing your budget for every last cent you can put into savings.  If you truly could be out of a job in 0-5 years  then the time to start hoarding cash is *now*, while you have a strong income.  Who knows... with a little luck you could hit FI before your job flies away.

Full disclosure though - i'm the guy considering taking on 50k of low-interest debt to put into savings in the belief that  I'll earn more than I pay.

hobbes1

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #11 on: October 01, 2014, 06:03:13 AM »
Thanks all, for your thoughts. Much appreciated.

As discussed in this thread as an aside, there are pro's and con's to investing in bond and etf funds with yield. The reality is, the value (NAV) of income generating funds goes up and down, just like stocks and stock funds. The price swings in NAV may be generally less than in the stock market but the income funds/ETF's are always generating a check every month/quarter. Some people like to invest in real estate and get a monthly rent check. They want the accumulation of equity as well as the steady check each month and the down side is poor renters, damaged property, housing market crash, etc. Upside is tax write offs and finally getting the property(s) paid off and having the monthly check from there on. The way we are approaching that is having a pile of savings invested in funds that generate income. We don't have the same worries as the land lords do and in addition to the monthly/quarterly check, we have the pile of money in the underlying principle. These are just two different methods of generating income streams from different sources. In addition to the income generating investments, we do and will continue to have stock fund investments as well (stock market always goes up over the long term, right?). So another revenue stream is eventually selling some of these to generate income as needed.

Right now, our income generating funds/ETFs are mostly in tax sheltered accounts. At the time of FIRE or sooner if needed (job loss), we may need to put in place SEPP in order to tap the income that is generated, without spending/selling the underlying holdings).

So, my thought in posting the original question would be: would people tend to favor paying the basic mortgage payment each month while banking as much money as possible (to essentially have a war chest on hand should job loss become a reality). IF the job holds out, at some point in next few years (barring any catastrophes) we will have adequate "spare" cash to just write a final check to the bank for the mortgage and be done with it. The benefit of not paying the mortgage ahead each month is: in case of job loss sooner rather than later, we have lots of ready cash on hand to get us through until another job could be obtained, etc. Some people might just prefer to opt for paying max on the mortgage priniciple each month and keep 6-12 months emergency fund in reserve just in case of job loss.

I think I am personally leaning much more towards banking max income, paying basic mortgage payment until we have enough set aside to pay it off at once.

Thanks for everyone's thoughts on this. It's been helpful to kick around the ideas and hear other's perspectives. Thanks Cheddar for the links!

PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #12 on: October 01, 2014, 06:31:37 AM »
Thanks all, for your thoughts. Much appreciated.

As discussed in this thread as an aside, there are pro's and con's to investing in bond and etf funds with yield. The reality is, the value (NAV) of income generating funds goes up and down, just like stocks and stock funds. The price swings in NAV may be generally less than in the stock market but the income funds/ETF's are always generating a check every month/quarter. Some people like to invest in real estate and get a monthly rent check. They want the accumulation of equity as well as the steady check each month and the down side is poor renters, damaged property, housing market crash, etc. Upside is tax write offs and finally getting the property(s) paid off and having the monthly check from there on. The way we are approaching that is having a pile of savings invested in funds that generate income. We don't have the same worries as the land lords do and in addition to the monthly/quarterly check, we have the pile of money in the underlying principle. These are just two different methods of generating income streams from different sources. In addition to the income generating investments, we do and will continue to have stock fund investments as well (stock market always goes up over the long term, right?). So another revenue stream is eventually selling some of these to generate income as needed.

Right now, our income generating funds/ETFs are mostly in tax sheltered accounts. At the time of FIRE or sooner if needed (job loss), we may need to put in place SEPP in order to tap the income that is generated, without spending/selling the underlying holdings).

So, my thought in posting the original question would be: would people tend to favor paying the basic mortgage payment each month while banking as much money as possible (to essentially have a war chest on hand should job loss become a reality). IF the job holds out, at some point in next few years (barring any catastrophes) we will have adequate "spare" cash to just write a final check to the bank for the mortgage and be done with it. The benefit of not paying the mortgage ahead each month is: in case of job loss sooner rather than later, we have lots of ready cash on hand to get us through until another job could be obtained, etc. Some people might just prefer to opt for paying max on the mortgage priniciple each month and keep 6-12 months emergency fund in reserve just in case of job loss.

I think I am personally leaning much more towards banking max income, paying basic mortgage payment until we have enough set aside to pay it off at once.

Thanks for everyone's thoughts on this. It's been helpful to kick around the ideas and hear other's perspectives. Thanks Cheddar for the links!

Parking the funds in cash is not financially optimal, otherwise your plan is sound (although I would disagree with the idea that focussing on yield is an effective risk management strategy - but there are worse ideas for sure).
You should explore the option of paying down the mortgage ASAP and, instead of hoarding cash, getting a HELOC. The HELOC can then be used in the event of job loss. Think of it as an emergency line of credit (ELOC).
There is another way to look at it: You are trying to insure yourself against the event of job loss and being short on cash. The interest you are paying in order to keep your cash in the bank is your insurance premium. The cost of a HELOC is lower while serving the same purpose.
« Last Edit: October 01, 2014, 06:33:45 AM by PeteD01 »

Bytowner

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #13 on: October 01, 2014, 06:46:25 AM »
Just wanted to pipe in to say the forum topics on this subject have made me do a 180 in the past week. I renewed my $285k mortgage 3 months ago at 2.97% for 5 years (this is Canada, we don't do 30 year terms) in July. I had planned to pay it all off in 8 years, with extra payments of $1500 a month plus whatever else we could throw at it. I'm now planning to open up a brokerage account and put that $1500 a month towards an ETF each month.

Still undecided whether I will just fill up TFSA room each year (my wife and I) and then shift to paying the mortgage with other $8,000 or if we should find something else do with the extra cash.

Barring the zombie apocalypse, I should come out ahead in either case.

PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #14 on: October 01, 2014, 07:17:55 AM »
Just wanted to pipe in to say the forum topics on this subject have made me do a 180 in the past week. I renewed my $285k mortgage 3 months ago at 2.97% for 5 years (this is Canada, we don't do 30 year terms) in July. I had planned to pay it all off in 8 years, with extra payments of $1500 a month plus whatever else we could throw at it. I'm now planning to open up a brokerage account and put that $1500 a month towards an ETF each month.

Still undecided whether I will just fill up TFSA room each year (my wife and I) and then shift to paying the mortgage with other $8,000 or if we should find something else do with the extra cash.

Barring the zombie apocalypse, I should come out ahead in either case.

It all depends on where you are in your investing career.
If your greatest risk is not being able to have enough to retire and you are young, leveraging the mortgage is definitely the way to go - but you need to buckle up.
My net worth in 2007 was about -$120k, at the bottom of the financial crisis it was -$320k and now it is 820k and is not leveraged anymore.
The numbers exclude real estate values and other hard assets.
This is how leveraged investing in equities and real estate looks like when you go all in: in a little bit more than six years from manageable debt to crushing debt to FI. And yes, it can go the other way just as easily and if you lose your nerve when that happens you could find yourself in a tight spot for a long time.
Without leverage I would not be anywhere near FI but it would not be a good idea to continue the game with retirement coming up in a few months.


nereo

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #15 on: October 01, 2014, 07:20:41 AM »
Just wanted to pipe in to say the forum topics on this subject have made me do a 180 in the past week. I renewed my $285k mortgage 3 months ago at 2.97% for 5 years (this is Canada, we don't do 30 year terms) in July. I had planned to pay it all off in 8 years, with extra payments of $1500 a month plus whatever else we could throw at it. I'm now planning to open up a brokerage account and put that $1500 a month towards an ETF each month.

Still undecided whether I will just fill up TFSA room each year (my wife and I) and then shift to paying the mortgage with other $8,000 or if we should find something else do with the extra cash.

Barring the zombie apocalypse, I should come out ahead in either case.
Glad to hear it... I think it's always better to have savings on hand and a low-rate mortgage than no mortgage and no savings.  Being in Canada myself I'm always a bit nervous about what my next mortgage term will be when my current one ends in three years, but I figure if it climbs dramatically we can use our accumulated savings to hack it to bits.  I do envy my friends in the US who have 30 year fixed terms at 3.x% - ah, well...

still might be worthwhile to keep a zombie preparedness kit - just in case.  Remember; shotgun shells never go bad, and at close range you don't even need to aim!

Cheddar Stacker

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #16 on: October 01, 2014, 07:59:02 AM »
It all depends on where you are in your investing career.
If your greatest risk is not being able to have enough to retire and you are young, leveraging the mortgage is definitely the way to go - but you need to buckle up.

+1

My net worth in 2007 was about -$120k, at the bottom of the financial crisis it was -$320k and now it is 820k and is not leveraged anymore.
The numbers exclude real estate values and other hard assets.
This is how leveraged investing in equities and real estate looks like when you go all in: in a little bit more than six years from manageable debt to crushing debt to FI. And yes, it can go the other way just as easily and if you lose your nerve when that happens you could find yourself in a tight spot for a long time.
Without leverage I would not be anywhere near FI but it would not be a good idea to continue the game with retirement coming up in a few months.

Ok PeteD01, I need to hear more about this. What kind of leverage, margin loans? Why so far underwater in 2007? Awesome turnaround, but I'd like to know what the strategy was. I don't plan to replicate it, but I do like debt and somewhat aggressive investing so I'm very curious.

PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #17 on: October 01, 2014, 09:58:53 AM »
It all depends on where you are in your investing career.
If your greatest risk is not being able to have enough to retire and you are young, leveraging the mortgage is definitely the way to go - but you need to buckle up.

+1

My net worth in 2007 was about -$120k, at the bottom of the financial crisis it was -$320k and now it is 820k and is not leveraged anymore.
The numbers exclude real estate values and other hard assets.
This is how leveraged investing in equities and real estate looks like when you go all in: in a little bit more than six years from manageable debt to crushing debt to FI. And yes, it can go the other way just as easily and if you lose your nerve when that happens you could find yourself in a tight spot for a long time.
Without leverage I would not be anywhere near FI but it would not be a good idea to continue the game with retirement coming up in a few months.

Ok PeteD01, I need to hear more about this. What kind of leverage, margin loans? Why so far underwater in 2007? Awesome turnaround, but I'd like to know what the strategy was. I don't plan to replicate it, but I do like debt and somewhat aggressive investing so I'm very curious.

These are estimates except the last number. I got out of training in the summer of 2000 and maxed out my 403b's since then. I had around 150k in my retirement accounts and a 250k mortgage, so maybe the number for 2007 is around -100k. In 2007, I took out a loan to subdivide a large lot and build a road and my mortgage debt ballooned to over 400k. My retirement accounts went to around 80k during the crisis and I lucked out selling my bond holdings and TREA holdings and buying equities near the bottom. My wife started 401k contributions (max) in 2008 and we both continued maximum contributions until now (thats 23.5k each for the last couple of years). I was able to sell one of my lots for over 100k in 2009 and sell a house at a 50k profit in 2011. Except for 100k I never paid more than the minimum towards the mortgages until 16 months ago. The last mortgage is almost paid off and my asset allocation is now 50% fixed income (TIAA Traditional) and 50% index funds. Taking into account estimated real estate values, my asset allocation is approximately 33/33/33 stocks/fixed income/real estate, with about 120k in real estate essentially illiquid for the foreseeable future.
At least 250k of our net worth is attributable to high income in the last couple of years.
We are going to sell our current house next year, move abroad and will rent henceforth.
If the real estate market had not crashed, I would be financially independent today based on real estate investments. I didn't win that game but the financial crisis went a long way to make up for that.
There is really no overall strategy to all of this except that I am a sucker for diversification and do not speculate. I simply invest in what is the most rational option at the time.
For example:
Providing developers with subdivided land was a very rational thing to do in 2007.
Taking out a loan to buy equities was not a very rational thing to do in 2007.
Selling fixed income during the financial crisis and buying equities was also the most rational thing to do at the time.
At 4.5%, buying back my mortgage debt (starting in 2013) was by far the most rational way to get my fixed income allocation to 50%.
Selling our house and relocating to Euroland with a good chunk of US$ in 2015 is also a very rational thing to do and who knows, if the Euro continues to fall, I might revisit the rent vs buy issue and buy a property in Europe.
And so on...

Some things work out and some do not but when you do it at the right time in your life and have a secure income odds are that you'll come out ahead with time.

Cheddar Stacker

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #18 on: October 01, 2014, 10:05:26 AM »
Cool, thanks for sharing. That's much different than I thought. I think what confused me is you left out the value of the real estate, which you stated but that didn't quite sink in.

I was thinking this was a "I borrowed a bunch of money in 2007 and dumped it into equities, then just rode the wave" kind of situation.

So are your married to Mrs. Pete on the forum? I've seen her posts a lot but was always curious who Pete was.

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PeteD01

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #20 on: October 01, 2014, 11:13:27 AM »
Cool, thanks for sharing. That's much different than I thought. I think what confused me is you left out the value of the real estate, which you stated but that didn't quite sink in.

I was thinking this was a "I borrowed a bunch of money in 2007 and dumped it into equities, then just rode the wave" kind of situation.

So are your married to Mrs. Pete on the forum? I've seen her posts a lot but was always curious who Pete was.

I'm not married to Mrs. Pete.
There is really no good way to account for the value of real estate, especially during crises.
I could not have sold the remaining land at all and the house would have had to be sold at foreclosure prices.
It is tempting to include equity in real estate in net worth estimates but it is not helpful for assessment of risk as non income producing real estate has aspects of a liability and an asset at the same time.

Bytowner

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #21 on: October 01, 2014, 11:25:22 AM »
So since most of these discussions are about long term mortgages in the US, I'm curious what the "let it ride" folks think of the Canadian situation.

2.97%, coming up for renewal in 2019, with the S&P 500 looking like Everest, and a double-whammy of higher rates coming in, at most (?), three years. Seems like I could quite easily get run over by a drop in equities when cheap money dries up, only to stand up and get backed-over with a higher interest rate on my mortgage.

Cheddar Stacker

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #22 on: October 01, 2014, 11:43:19 AM »
So since most of these discussions are about long term mortgages in the US, I'm curious what the "let it ride" folks think of the Canadian situation.

2.97%, coming up for renewal in 2019, with the S&P 500 looking like Everest, and a double-whammy of higher rates coming in, at most (?), three years. Seems like I could quite easily get run over by a drop in equities when cheap money dries up, only to stand up and get backed-over with a higher interest rate on my mortgage.

I think it depends less on current market conditions and more on your timeline for living in your home. There are people living in the US on this forum that advocate getting a 5/1 ARM if you plan to move anytime in the next 5 years. If you're not familiar, this is an adjustable rate mortgage with a low rate that typically requires little more than interest only payments.

If your rate goes up in 5 years with your renewal, re-evaluate then and start paying down the debt quicker. You won't have to pay it all at once, you will simply lose the opportunity to buy more stocks at that point. It would be a tough time to lose that opportunity if stocks are priced very low, but you have no idea where either market (stocks or interest rates) will be in 5 years so it's likely not worth estimating.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #23 on: October 03, 2014, 07:56:24 AM »
So since most of these discussions are about long term mortgages in the US, I'm curious what the "let it ride" folks think of the Canadian situation.

2.97%, coming up for renewal in 2019, with the S&P 500 looking like Everest, and a double-whammy of higher rates coming in, at most (?), three years. Seems like I could quite easily get run over by a drop in equities when cheap money dries up, only to stand up and get backed-over with a higher interest rate on my mortgage.

Thought i'd pipe in here, since I"m a US citizen now living in Canada with a Canadian mortgage.  What's been strange to me about the Canadian mortgage system is that it's all basically ARMs  - with your term resetting every 4 or 5 years, and no way of predicting what it will be the next time.

But from your post it sounds like you are worried about two seperate (but somewhat correlated things); a drop in the market and a hike in your mortgage rate in 2019.
There will certainly be a drop in the market, but whether the peak will be tomorrow at 1950 or two years from now at 2300 no one knows.  Just keep investing and holding, and the spikes and drops won't matter much over time.
 As to what you should do about the likely possibility your rate will increase in 2019, I think there's two approaches you can take.  The first is to pay it down aggressively no, so that any rate increase won't affect your monthly payments as much when it does come.  The problem with this approach is that you'll be 'locking in' some paltry gains of ~3.0%.  Not a very good return. For that reason I favor putting all my extra cash into savings whenever my rate is >>5%.
 The second approach is to stay aware that a rate hike may be coming and be prepared to push more of income at the loan then.  Thankfully, about a year beforehand you should know which way the financial winds are blowing based on the market rate at that time.  Good news!  Under most circumstances, rates increase when the economy has been doing well and they are trying to 'put the breaks' on the economy to counteract inflation.  Not always, but most times.  So, under (most) circumstances your investments will be doing well, and if your rate suddenly jumps above 5% you can consider selling some to throw at your mortgage, thereby 'locking in' gains at that higher rate.  Even if you get hit with the 'double-whammy' of a drop in the market with a drop in your investments, you can still calculate what your rate would be at X% and adjust your budget accordingly.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #24 on: October 03, 2014, 08:17:15 AM »
I am in a similar situation as you.  High dual income, only mortgage debt, similar amount in investments and hoping to retire in less than 10 years.  We are focussing on paying off the mortgage as fast as we can.  Our mortgage amount is much bigger though.  Can't wait for the day to be able to choose a lesser paying job if i want and to be free!  We are still investing at the same time but only about 15% of our income.  Once mortgage free we will up our investments to about 50%.
This is really backwards, don't do this.
You're reducing your liquidity to pay off a low interests, subsidized inflation hedge, vs increasing your liquidity into assets with gains likely to be double your mortgage interest?

I still don't understand why people view paying off mortgage to be a "safety", in case of loose job etc. Once you're done sure, but when you're halfway? You put yourself at much greater risk if something happens! What good is a $100K mortgage going to do you then vs $200K mortgage and $100k in stocks? Having some stocks is useful, have a somewhat pay of mortgage doesn't get you lower expenses.

With all the data so in favor of keeping a mortgage I'm surprised so many people here talk about paying it off. I thought this place was about making calculated, rational financial decisions instead of emotional ones? I don't see how "Sleep better at night" is a good reason to loose money, any more than claiming that a Hummer will make me happy and safe.
« Last Edit: October 03, 2014, 08:29:29 AM by Scandium »

frizzywhiskers

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #25 on: October 03, 2014, 08:42:12 AM »

I am in a similar situation as you.  High dual income, only mortgage debt, similar amount in investments and hoping to retire in less than 10 years.  We are focussing on paying off the mortgage as fast as we can.  Our mortgage amount is much bigger though.  Can't wait for the day to be able to choose a lesser paying job if i want and to be free!  We are still investing at the same time but only about 15% of our income.  Once mortgage free we will up our investments to about 50%.
This is really backwards, don't do this.
You're reducing your liquidity to pay off a low interests, subsidized inflation hedge, vs increasing your liquidity into assets with gains likely to be double your mortgage interest?

I still don't understand why people view paying off mortgage to be a "safety", in case of loose job etc. Once you're done sure, but when you're halfway? You put yourself at much greater risk if something happens! What good is a $100K mortgage going to do you then vs $200K mortgage and $100k in stocks? Having some stocks is useful, have a somewhat pay of mortgage doesn't get you lower expenses.

With all the data so in favor of keeping a mortgage I'm surprised so many people here talk about paying it off. I thought this place was about making calculated, rational financial decisions instead of emotional ones? I don't see how "Sleep better at night" is a good reason to loose money, any more than claiming that a Hummer will make me happy and safe.

My husband and I are at the point in our lives where we have worked full time for 25 years and no longer enjoy our day jobs.  Having a mortgage ties us to keeping these jobs.  I've done the math and because we are paying our mortgage off at such a fast pace we come out about the same vs investing the money.   Plus in 5 yrs when mortgage is gone we will have a paid for house, about $600,000 in investments, a nice sized emergency fund and the freedom to work part time! 

foobar

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #26 on: October 03, 2014, 08:48:14 AM »
So since most of these discussions are about long term mortgages in the US, I'm curious what the "let it ride" folks think of the Canadian situation.

2.97%, coming up for renewal in 2019, with the S&P 500 looking like Everest, and a double-whammy of higher rates coming in, at most (?), three years. Seems like I could quite easily get run over by a drop in equities when cheap money dries up, only to stand up and get backed-over with a higher interest rate on my mortgage.

It comes down to your ability to take risk. If you could suck up a 500 dollar/month increase in your housing costs, the interest rate increase doesn't matter. It might shift the balance point between paying off the debt and investing.

As far as calling the market top, look at 1974-199 and tell me when it didn't look like Everest in nominal dollars:)  Seriously if 2008-9,2000-2002, 1973-1974 happens tomorrow, by 2019 the markets will be back close to this nominal level. When you get closer (1-2 years out) and have more visibility (i.e. rates rise from 2% to 2.5% is a lot different than 2% to 6%) feel free to adjust your strategy to match your situation.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #27 on: October 03, 2014, 11:10:14 AM »
...
My husband and I are at the point in our lives where we have worked full time for 25 years and no longer enjoy our day jobs.  Having a mortgage ties us to keeping these jobs.  I've done the math and because we are paying our mortgage off at such a fast pace we come out about the same vs investing the money.   Plus in 5 yrs when mortgage is gone we will have a paid for house, about $600,000 in investments, a nice sized emergency fund and the freedom to work part time!

Admittedly you have all the facts here, but I'm confused how "the math" comes out to favor paying off the mortgage, and how it will come out about the same as investing the money.  This certainly would be true if your mortgage is >>4% - and if that's the case I'd suggest looking into refinancing.

Having a mortgage doesn't hold people to their jobs per-se.  Having insufficient assets to pay for monthly expendatures does.  I believe that's what Scandium was trying to say.  If you pay the minimum to your mortgage each month and invest the rest, you will (historically) earn 6-7% after inflation over long time-scales. Yes, your monthly payments in ER will be higher than if you had no mortgage, but you will have additional investments that can more than compensate for the increase. 

 If you are planning on using the 4% SWR then the math gets even simpler.  By choosing a 4% SWR you are effectively saying that you are comfortable with being able to withdraw 4% per year regardless of the short-term market conditions, and that the chances of your money ever running out are small.  Ergo, if your mortgage is at or less than 4% you'd be better having that money invested vs paying off your mortgage.  The return that you get on your money (by your own acceptance of the 4%) will exceed the interest you pay on your mortgage over time, even with recessions, corrections, etc.

Also, even if you just pay your monthly minimum your mortgage will dissapear after x years.  Presumably, the principle of anything you've invested will still remain, because you've been relying on just the interest of your investments to counteract the interest paid on your mortgage.  From that point forward you have a bigger stach and no mortgage payment.

Le Barbu

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #28 on: October 03, 2014, 02:00:46 PM »
I am in a similar situation as you.  High dual income, only mortgage debt, similar amount in investments and hoping to retire in less than 10 years.  We are focussing on paying off the mortgage as fast as we can.  Our mortgage amount is much bigger though.  Can't wait for the day to be able to choose a lesser paying job if i want and to be free!  We are still investing at the same time but only about 15% of our income.  Once mortgage free we will up our investments to about 50%.
This is really backwards, don't do this.
You're reducing your liquidity to pay off a low interests, subsidized inflation hedge, vs increasing your liquidity into assets with gains likely to be double your mortgage interest?

I still don't understand why people view paying off mortgage to be a "safety", in case of loose job etc. Once you're done sure, but when you're halfway? You put yourself at much greater risk if something happens! What good is a $100K mortgage going to do you then vs $200K mortgage and $100k in stocks? Having some stocks is useful, have a somewhat pay of mortgage doesn't get you lower expenses.

With all the data so in favor of keeping a mortgage I'm surprised so many people here talk about paying it off. I thought this place was about making calculated, rational financial decisions instead of emotional ones? I don't see how "Sleep better at night" is a good reason to loose money, any more than claiming that a Hummer will make me happy and safe.

I strongly agree with the "halfway" argument. I always knew my situation will be fine in the long run and the short term was pretty good.

What I did for most of the 15 years I own a house is pay the minimum and max the investments. Now, I can pay off the mortgage principal in the next 5 years and the investments are over 500K$. That's why I consider the better cash flow provided by the end of the monthly payments.

I have to say that I'm in Canada and the mortgage interests are not subsidized. The only way to go for us would be to borrow on the HELOC portion and invest in a non-sheltered investment to recover the taxes.

Before to do so, I just switched some bonds/stock from 25/75 to 20/80 and pretty soon I'll be 10/90, I don't do it overnight because of transaction fees (CAD to USD etc). Regular contribution will do the job.
« Last Edit: October 03, 2014, 02:03:42 PM by Le Barbu »

frizzywhiskers

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #29 on: October 03, 2014, 09:00:58 PM »
...
My husband and I are at the point in our lives where we have worked full time for 25 years and no longer enjoy our day jobs.  Having a mortgage ties us to keeping these jobs.  I've done the math and because we are paying our mortgage off at such a fast pace we come out about the same vs investing the money.   Plus in 5 yrs when mortgage is gone we will have a paid for house, about $600,000 in investments, a nice sized emergency fund and the freedom to work part time!

Admittedly you have all the facts here, but I'm confused how "the math" comes out to favor paying off the mortgage, and how it will come out about the same as investing the money.  This certainly would be true if your mortgage is >>4% - and if that's the case I'd suggest looking into refinancing.

Having a mortgage doesn't hold people to their jobs per-se.  Having insufficient assets to pay for monthly expendatures does.  I believe that's what Scandium was trying to say.  If you pay the minimum to your mortgage each month and invest the rest, you will (historically) earn 6-7% after inflation over long time-scales. Yes, your monthly payments in ER will be higher than if you had no mortgage, but you will have additional investments that can more than compensate for the increase. 

 If you are planning on using the 4% SWR then the math gets even simpler.  By choosing a 4% SWR you are effectively saying that you are comfortable with being able to withdraw 4% per year regardless of the short-term market conditions, and that the chances of your money ever running out are small.  Ergo, if your mortgage is at or less than 4% you'd be better having that money invested vs paying off your mortgage.  The return that you get on your money (by your own acceptance of the 4%) will exceed the interest you pay on your mortgage over time, even with recessions, corrections, etc.

Also, even if you just pay your monthly minimum your mortgage will dissapear after x years.  Presumably, the principle of anything you've invested will still remain, because you've been relying on just the interest of your investments to counteract the interest paid on your mortgage.  From that point forward you have a bigger stach and no mortgage payment.

It seems I have hijacked the OP's post here and that was not my intention.  However, as we are on the same subject and you are asking, I thought I'd provide a little more info on how I am calculating and seeing things. 

First off we are ages 42 and 44, hoping to retire in 10 years.  We currently have an investment networth of about $400,000 and do contribute about $20,000 a year to this, some of which is company matched.  We will be continuing this going forward.  We also have about $300,000 in home equity.  We live in Canada where mortgages differ a little from the US and seem to be a lot bigger!  Our mortgage stands today at almost $400,000 exactly - we have 4 years left in a 5 year term mortgage at 3.26%.  Right now we are locked into weekly payments of $900 a week which essentially puts us at a 10 year amortization if we don't put any extra money down on the mortgage.

We currently have an additional $2400 a month to work with.  If we take this $2400, and combine it with our typical annual bonuses we will have our mortgage paid off in full somewhere between 4 - 5 years.  Hoping to be closer to the 4 year mark so we don't have to renew our mortgage term.  According to my mortgage calculator we will be paying about $33,000 in interest during this period.

Compare this scenario to not putting any additional payments on the mortgage and letting it run its 10 year course, we will then be paying almost $68,000 in interest.  But say we took the $2400 a month extra during that time and invested it hoping for a 6% return.  According to my trusty compound interest calculator we will have made $288,000 in contributions and gained $106,000 in interest bringing us to around $394,000 at the end of 10 years.  Not too shabby indeed!

But say our mortgage is paid off in 5 years and we now have an additional 75,000 a year available.  If we take this $75,000 (based on monthly average of $6250 investing monthly) at 5 years at 6% I calculate us at $375,000 in contributions with $64,000 in interest and a total value at $439,000.  This also doesn't include that much of this money would be invested into RRSP's which would also provide a large tax refund each year, not to mention the mortgage interest savings.

To me it seems to come out very comparable if not better to pay off the mortgage first.  And combined with the peace of mind and future options it will give us this seems like the way to go.

If I am mistaken in my calcs I'd love to hear some feedback as I do admit its very quick, back of the napkin type calcs.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #30 on: October 03, 2014, 09:33:48 PM »
@fuzzy, your result is mathematically impossible. 6% > 3.26%. Something is off. It's late at nite and I'm typing on a phone so I can't run numbers, but they need to be rerun for sure.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #31 on: October 03, 2014, 09:42:50 PM »
For sure 6% is greater than 3.26% but I am doubling up on the amount being invested for the 5 year period which comes out almost equal.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #32 on: October 03, 2014, 10:07:23 PM »
Basically comparing $2400 a month for 10 years vs $6250 a month for 5 years both at 6%

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #33 on: October 03, 2014, 10:34:07 PM »
Frizzy, not fuzzy, sorry about that.

Either way you are working with the same amount of capital right. One method doesn't magically produce more principal, so which ever option produces the higher return will end up with the higher ending balance. Something is missing.

What are the basic facts. Lay them out for us. I was confused by them in your reply to nereo.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #34 on: October 04, 2014, 02:02:50 AM »
I saw pay off the mortgage completely.  For one, if you have the defined goal, you will be more likely to make it.  Example: "Just 20,000 left, why don't we not do X this year so we can eliminate it this year!"

Further, do you have PMI on it still?  Paying that sucker off gets rid of PMI faster.

And, I think it has been said.  You will free FREE to have it be gone!

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #35 on: October 04, 2014, 06:21:14 AM »
Hello all. OP here.

Thanks for all of the discourse on this topic. Interesting to see how our Canadian friends are approaching mortgages as well. For purposes of clarity: as noted in a previous post, paying off the mortgage seems to be more of an "emotional" calculation rather than a cold, hard look at the most "optimal" calculations for maximum return. I suppose this is true.

The reality for us is that maximizing investments in the stock market while carrying a home mortgage only really makes sense under two conditions. One, that our employment is stable for the long term (most likely, mine is not and I'm the major earner in our home) and Two, if we can ride out a long horizon to capture proposed gains in the market. In reality, "the stock market always goes up" is great in hindsight however, one never knows if the dips/recessions/depressions/crashes that come along here and there will happen when you personally need your money most.

Considering that I am in my 40's and my wife is younger (and we have children too!), we have a fairly long horizon of life expectancy ahead of us (if all goes well :) . Thus, to us, the rational decision is to divest all debt while we can (eg: over the next couple of years while employment continues) and then proceed with further max investments for as long as employment holds out or until we are ready to FIRE. This would be what is simply more comfortable for us rather than the most coldly rational move we could make.
  The biggest challenge for us was deciding whether to pour the money into the mortgage each month (we would still be contributing to our retirements at work and Roth IRa's simultaneous to this) or pour the money into some account until we have accumulated enough to write one check to the bank and be done. This second idea seems best as it allows us to save towards a near term target, protects us in case of sudden job loss as we will have a large and growing pile of ready cash, and also allows us to capture some interest as we would probably invest in VBTLX as it is relatively "safe", yields 2.15% as of now and has an expense ratio of 0.08 and also has potential for price gains (or losses!) as well.
  It's been helpful to hear everyone else's ideas on this topic. Sometimes an emotional calculation can trump a logical calculation for a given person in a given set of circumstances.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #36 on: October 07, 2014, 09:59:31 AM »
I still don't understand why people view paying off mortgage to be a "safety", in case of loose job etc. Once you're done sure, but when you're halfway? You put yourself at much greater risk if something happens! What good is a $100K mortgage going to do you then vs $200K mortgage and $100k in stocks? Having some stocks is useful, have a somewhat pay of mortgage doesn't get you lower expenses.

What if the situation is reversed: would you keep 200k stocks and 100k mortgage, versus 100k in just stocks? The reason being, if I lose my job and the market crashes (like what happened in 2008) then if I don't have a mortgage I can at least continue living, while reducing all my expenses as much as I can. The monthly withdrawals I take from my stocks will be "at loss" for sure but the idea is that hopefully I can get another job or the market bounces back soon enough.

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #37 on: October 07, 2014, 12:39:13 PM »
I still don't understand why people view paying off mortgage to be a "safety", in case of loose job etc. Once you're done sure, but when you're halfway? You put yourself at much greater risk if something happens! What good is a $100K mortgage going to do you then vs $200K mortgage and $100k in stocks? Having some stocks is useful, have a somewhat pay of mortgage doesn't get you lower expenses.

What if the situation is reversed: would you keep 200k stocks and 100k mortgage, versus 100k in just stocks? The reason being, if I lose my job and the market crashes (like what happened in 2008) then if I don't have a mortgage I can at least continue living, while reducing all my expenses as much as I can. The monthly withdrawals I take from my stocks will be "at loss" for sure but the idea is that hopefully I can get another job or the market bounces back soon enough.

IMO I would say yes, given a job loss and market crash I would prefer 200k stocks and 100k mortgage vs just 100k in just stocks.  The reason can be summed up as "liquidity".   
Let's say having 200k stocks + 100k mortgage is "scenario 1" and having only 100k stocks (but no mortgage) is "scenario 2".  We are sticking with the stated mortgage rate of 3.25% with 10years left ($997/month or 11.9k/year).  In either case I have very mustachian annual expenses of $25k/year.
Under both scenarios I 1) loose my job and 2) the market drops 30% (a big drop) and stays there for 2 years.

Scenario 1 my portfolio drops to 140k.  After two years of unemployment I will have $66.2k. I will have gained $17k in home equity.
Scenario 2 my portolio drops to 70k.  After two years of unemployment I will have $20k, or less than a year's living expenses.  My home equity did not change.

nyold

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Re: What would you do? (home payoff vs. bulkup savings vs. both)
« Reply #38 on: October 07, 2014, 02:38:01 PM »
What if the situation is reversed: would you keep 200k stocks and 100k mortgage, versus 100k in just stocks? The reason being, if I lose my job and the market crashes (like what happened in 2008) then if I don't have a mortgage I can at least continue living, while reducing all my expenses as much as I can. The monthly withdrawals I take from my stocks will be "at loss" for sure but the idea is that hopefully I can get another job or the market bounces back soon enough.

IMO I would say yes, given a job loss and market crash I would prefer 200k stocks and 100k mortgage vs just 100k in just stocks.  The reason can be summed up as "liquidity".   
Let's say having 200k stocks + 100k mortgage is "scenario 1" and having only 100k stocks (but no mortgage) is "scenario 2".  We are sticking with the stated mortgage rate of 3.25% with 10years left ($997/month or 11.9k/year).  In either case I have very mustachian annual expenses of $25k/year.
Under both scenarios I 1) loose my job and 2) the market drops 30% (a big drop) and stays there for 2 years.

Scenario 1 my portfolio drops to 140k.  After two years of unemployment I will have $66.2k. I will have gained $17k in home equity.
Scenario 2 my portolio drops to 70k.  After two years of unemployment I will have $20k, or less than a year's living expenses.  My home equity did not change.

I see. Thank you. My biggest worry was that with 200k stocks + 100k mortgage, if I lose the cashflow from job and my portfolio tanks, I may not make enough to continue paying the mortgage, thus risking a foreclosure. But it looks like if I plan it well enough, the mortgage shouldn't be too big compared to my (even tanked) portfolio.