Author Topic: DONT Payoff your Mortgage Club  (Read 899626 times)

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #3400 on: December 16, 2022, 12:55:15 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3401 on: December 16, 2022, 01:27:22 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).
Winning!
Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #3402 on: December 16, 2022, 01:33:25 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).

Winning!
Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.

Usually, though I've let it build up a bit now (~$50k) because I expect to move next year and want it a bit more stable for the potential down payment. Still have $300k+ in equities in a taxable account though.

YttriumNitrate

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Re: DONT Payoff your Mortgage Club
« Reply #3403 on: December 16, 2022, 01:41:50 PM »
Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).
Winning! Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.
Well, yes. But, in days gone by one the pay-off-your-mortgage arguments was that a paid off mortgage gave you a guaranteed return on your money, and that the risk associated with investing was not properly considered by those keeping their mortgages. That's why I find today's FDIC insured rates so notable.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3404 on: December 16, 2022, 01:50:14 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).

Winning!
Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.

Usually, though I've let it build up a bit now (~$50k) because I expect to move next year and want it a bit more stable for the potential down payment. Still have $300k+ in equities in a taxable account though.
I know the conventional wisdom is "pay yourself first", but I always did both. Invest automatically, then challenge yourself to spend the rest as wisely as possible. I think this works for a lot of mustachians. I also worked on commission, so I kept a fat EF and lived on last month's income. I also have a fondness for Real Estate, so I'm comfortable with larger sums of money on standby for deployment.

Actually, I made that comment mostly for the benefit of other readers of this thread. It's crazy that the tables have turned so dramatically. While I don't comment on the celebration threads, I do peruse them occasionally and I never miss an opportunity to invite folks (anywhere on the forum) to drop by the DPOYM Club. We're the only place that people can do more than celebrate a decision.

Thanks to you and the rest of the team who help keep the DPOYM banner flying high!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3405 on: December 16, 2022, 02:16:18 PM »
Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).
Winning! Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.
Well, yes. But, in days gone by one the pay-off-your-mortgage arguments was that a paid off mortgage gave you a guaranteed return on your money, and that the risk associated with investing was not properly considered by those keeping their mortgages. That's why I find today's FDIC insured rates so notable.
Funny, we met with our Financial Planner recently. On the topic of when to start collecting Social Security, they said, "Where are you going to get a guaranteed 8% these days?"

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3406 on: December 16, 2022, 03:13:58 PM »
Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).
Winning! Of course, y'all are just using those accounts for accumulation. You move it into equities at some point, right? Assuming whatever level of EF you're comfortable with.
Well, yes. But, in days gone by one the pay-off-your-mortgage arguments was that a paid off mortgage gave you a guaranteed return on your money, and that the risk associated with investing was not properly considered by those keeping their mortgages. That's why I find today's FDIC insured rates so notable.
Funny, we met with our Financial Planner recently. On the topic of when to start collecting Social Security, they said, "Where are you going to get a guaranteed 8% these days?"
Guarantees that aren't in any way guaranteed. Gotta make it quite a few years for that 8% increase in SS for waiting to approach being the same thing as an 8% return.

YttriumNitrate

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Re: DONT Payoff your Mortgage Club
« Reply #3407 on: December 16, 2022, 03:36:42 PM »
Guarantees that aren't in any way guaranteed. Gotta make it quite a few years for that 8% increase in SS for waiting to approach being the same thing as an 8% return.
From what I recall, the annual increases in SS are more or less set up so that the average person will receive the same total amount regardless of when they start collecting.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #3408 on: December 16, 2022, 09:12:59 PM »
From what I recall, the annual increases in SS are more or less set up so that the average person will receive the same total amount regardless of when they start collecting.

Exactly.  It is actuarily the same.  But the SS increases are guaranteed and are inflation-adjusted to boot!  From a retirement planning standpoint it is the bomb dot com.  It is a home run.  On top of that, educated, financially well-off people (which describes most of the people here) tend to live longer than average.  So if you want to play the averages, delay as long as you can.  If your family or personal history suggests you might live less than average, then maybe consider taking SS sooner. 

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3409 on: December 16, 2022, 09:13:35 PM »
Guarantees that aren't in any way guaranteed. Gotta make it quite a few years for that 8% increase in SS for waiting to approach being the same thing as an 8% return.
From what I recall, the annual increases in SS are more or less set up so that the average person will receive the same total amount regardless of when they start collecting.
Yeah - breakeven is something like 84 the way SSA does the math. But if you can invest social security, and you don't want to work much, taking at 62 is best with typical market returns (obviously not guaranteed) Full retirement age the "reduce benefits if you work too much" goes away.

Of course looking at it as longevity insurance the wait till 70 move makes more sense, but insurance does typically cost you money - can certainly be worth it depending on individual circumstances.

ETA: taxes can move the needle too of course.

More edits: having a hard time typing actually tonight. I swear it was just one beer with dinner 3 hours ago officer.
« Last Edit: December 16, 2022, 09:17:49 PM by dandarc »

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #3410 on: December 16, 2022, 10:06:21 PM »
Yeah - breakeven is something like 84 the way SSA does the math. But if you can invest social security, and you don't want to work much, taking at 62 is best with typical market returns (obviously not guaranteed) Full retirement age the "reduce benefits if you work too much" goes away.

Of course looking at it as longevity insurance the wait till 70 move makes more sense, but insurance does typically cost you money - can certainly be worth it depending on individual circumstances..

But the guarantee is the kicker.  You get automatic step up plus inflation.  The market returns 10% on average as well all know.  So why is the 4% rule not the 10% rule?  Because there is no guarantee.  If I could get ~8% plus inflation guaranteed I wouldn't have dime in the stock market.  That's what you get by delaying SS. 

Holocene

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Re: DONT Payoff your Mortgage Club
« Reply #3411 on: December 16, 2022, 10:13:46 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)
Even better are t-bills.  The official rates today were 3.84% for 4 weeks, up to 4.62% for 52 weeks.  Or just use VUSXX treasury money market at Vanguard if t-bills are too much work for you.  VUSXX has a 7 day SEC yield of 3.86% and continues to go up.  If you live in a state with income tax, it's an even better deal since t-bills are exempt from state/local taxes.  I calculate my tax equivalent yield to be 4.14% for VUSXX.  I finally moved away from Ally savings when I realized how big the gap was getting.  Definitely no reason to pay extra on my 3% mortgage!

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3412 on: December 17, 2022, 12:51:00 AM »
Yeah - breakeven is something like 84 the way SSA does the math. But if you can invest social security, and you don't want to work much, taking at 62 is best with typical market returns (obviously not guaranteed) Full retirement age the "reduce benefits if you work too much" goes away.

Of course looking at it as longevity insurance the wait till 70 move makes more sense, but insurance does typically cost you money - can certainly be worth it depending on individual circumstances..

But the guarantee is the kicker.  You get automatic step up plus inflation.  The market returns 10% on average as well all know.  So why is the 4% rule not the 10% rule?  Because there is no guarantee.  If I could get ~8% plus inflation guaranteed I wouldn't have dime in the stock market.  That's what you get by delaying SS.
Exactly this.

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3413 on: December 17, 2022, 11:38:24 AM »
Back to the club. Just got a 7/1 ARM at 4.625%. Let's hope rates drop for a refi.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3414 on: December 17, 2022, 02:11:24 PM »
Back to the club. Just got a 7/1 ARM at 4.625%. Let's hope rates drop for a refi.
Wonder if anyone does a 2nd mortgage on similar terms - theoretically have $70-100k in equity languishing in my house right now. Not quite as good as fixed for 30 years, but that rate is more friendly looking than what's available for the longer-term fixed rates and 7 years is still likely to work out, particularly if rates come down and can refinance it.

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3415 on: December 17, 2022, 03:17:00 PM »
In order to get this rate, I had to go for a jumbo loan. So I had to put less down which left some cash on hand. Conforming loan rates were higher by 0.75-0.875%.

We will be itemizing, so a significant fraction of the mortgage will be tax deductible. But the itemization benefits decrease over time as the amount of interest comes down and the standard deduction goes up.

The monthly payments with the jumbo loan are higher and we have the income to support it as long as we are working (mortgage amount < 2.5x gross income with PITI < 20% gross).

However, we are getting closer to retirement (say 7-10 years out). We are maxing out all tax advantaged accounts. Trying to decide what to do with the extra cash and also have some extra monthly savings.

1. Just put it in a broad stock (or bond regular or tax exempt bond fund) index funds keeping in mind tax efficiency (not risk free)
2. HYSA are up to 3.3% (e.g. at  Cap One etc) but this is before tax. Risk free and provides liquidity but rates not guaranteed.
3. Buy ibonds for this year and the next for both of us. Risk free but amount to put in is limited to 10K per person per year.

Most of our savings are in tax deferred accounts.

Any other options to consider with the 7-10 year timeline? 

For this year and the next, we will probably do stick with the HYSA primarily to keep things simple.

Holocene

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Re: DONT Payoff your Mortgage Club
« Reply #3416 on: December 17, 2022, 04:47:44 PM »
@rpr - For a 7-10 year timeline, I'd probably do mostly stocks, assuming you can handle stocks going down and not panic and sell.  With the S&P500/Total US Market down around 20% YTD, I'd bet on stocks having a decent positive return over a 7-10 year timeframe.  But there's always risk in stocks...

I think maxing out I bonds is a good idea for now.  If you really want, you can create a revocable trust and throw another $10k of I bonds in there each year.  Not quite as appealing as it was a few months ago with a 9+% yield, but still maybe worth it.  You might have other reasons why a trust would be beneficial anyway.  Or there's the option to buy more I bonds now as gifts between you and your partner for future years.  I wouldn't do more than 1 years worth of gifts at this point (deliver in 2024).  These gifts would basically be the same as your 2023 I bonds, earning the same rates and accessible at the same time.

I mentioned T-bills or treasury money markets upthread.  I think these are the best places to park short-term cash since they are handily beating most HYSA right now and have the advantage of being exempt from state and local income taxes.  T-bills are very liquid (if you buy at a brokerage and NOT Treasury Direct!), but you would need to sell them and wait a day for them to settle.  So if you needed cash immediately, that could be a problem.  But I think they'd be on par with accessibility of a HYSA, or maybe an extra day or two.  Ideally, you'd hold the T-bills to term.  You will have to accept the current market rate if you sell early and could lose money.  A rolling ladder would minimize that small risk, or just use a money market fund and accept slightly lower rates.  I also enabled checkwriting and bill pay at Fidelity that will automatically withdraw from my money market funds, so that money is immediately accessible and still earning 3.8-3.9% right now.

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3417 on: December 17, 2022, 05:13:18 PM »
@Holocene -- Thanks for the suggestions.

Once I set things up, I'm a kinda hands off person. I find that even the I bonds are a little hassle. Once more account(s) that I need to remember and write down for my wife. The T bills and stuff looks like even more work to me. I suppose I should read up on them a little bit more and educate myself.

I am leaning towards the stock market while acknowledging the risk. Use the existing cash stash to create a 1 year EF and throw the rest into something like VTSAX. Also set up monthly transfers from our bank account directly to buy more VTSAX.  This would be a simple path to follow. Then evaluate next December.

Holocene

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Re: DONT Payoff your Mortgage Club
« Reply #3418 on: December 17, 2022, 08:38:56 PM »
@rpr - If you have a Fidelity account or would be open to getting one, you can set up the T-bills to AutoRoll.  It still takes some work to set up a T-bill ladder, but after you do, the bills will keep rolling into new bills of the same duration when they mature unless you stop it.  I think Schwab might also do AutoRoll but I believe they leave you out for a week in between so not quite as good.

Say you want to set up a ladder of 26 week (6 month) T-bills maturing every 4ish weeks.  26 week T-bills auction every week on Mondays.  You need to place your order on Sunday or early Monday as I think the cut off is 10am ET.  You need to purchase in quantities of $1k.  If you started this week and placed your order on 12/18 or early 12/19, the issue date is 12/22/22 and the bill will mature on 6/22/23.  If you set it to AutoRoll (an option when you place the initial order), Fidelity will automatically purchase another 26 week T-bill of the same quantity with an issue date of 6/22/23 that matures on 12/21/23.  To set up your next rung in 4 weeks, you'd make another purchase for the 26 week T-bill auction on 1/15/23 with an issue date of 1/19, maturing 7/20 and also set that to AutoRoll.  And you'd continue to make new purchases every 4 weeks until you had your ladder built up.  Since 26 is not divisible by 4, you'd need to have a couple rungs at 3 weeks, or a short 2 week rung or a longer 6 week rung at the end.  But anyway, after your ladder is set up, you only have to worry about it when you need money.  At that point, you can stop the AutoRoll for the next upcoming bill and either wait for it to mature if you have time, or sell it if you need money more quickly.  And you always have money within 4-6 weeks of maturity, so you're unlikely to lose principal or much interest.  You can liquidate the whole thing if you need to as well. 

The most recent 26 week T-bills last week auctioned at 4.807%.  Honestly, if interest rates keep rising quickly, this may not even gain you a whole lot over using a treasury/federal money market fund.  The T-bills are a higher rate now, but 6 months is a long time and the money market funds will likely catch up at some point.  So if it's not worth the effort, that's understandable.  Just thought I'd explain how it'd work at Fidelity without needing to be too hands on. 

Since you mention VTSAX, I'll assume you might have a Vanguard account?  VUSXX at Vanguard is a very good treasury money market fund that will probably net you 0.5-0.75% over a HYSA, or more if you're in a high income tax state.  VMFXX, the default settlement fund is also good, but generally has less eligible government obligations income (73% vs. 99.9% last year) and therefore won't save you quite as much on state income tax.  VMFXX seems to react quicker to the rising rates though so it might even out.  VUSXX is at 3.89% and VMFXX is 3.99% as of yesterday.  Not a bad place to park some cash for an EF or until you figure out what else you might want to do with it.  I'd consider these about as safe as FDIC insured savings accounts since they literally hold T-bills or government securities/re-purchase agreements.  In either case you're relying on the US government, which I think is a pretty safe bet!

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3419 on: December 17, 2022, 09:38:31 PM »
Thanks again @Holocene for taking the time to explain. I am beginning to understand how to implement that.

And indeed we do have a taxable account at vanguard with a couple of funds (VFIAX/VTSAX). There's not too much in those two yet as most of our savings are in tax deferred.  I had not even considered VMFXX or VUSXX. That's a great idea and would work well and is easy to implement. Given the current rates, the after tax difference between the mortgage rate and VUSXX is about 0.8%. That is a reasonable price to pay for preserving (safe) liquidity. Also I would guess that if the interest rates decrease, both the mortgage rates and VUSXX might track each other.

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Re: DONT Payoff your Mortgage Club
« Reply #3420 on: December 18, 2022, 08:57:31 PM »
At one point, I was more Pay off my Mortgage.  In fact, I had a paid off mortgage.  But then I decided I’d rather have a fat brokerage account, so when I moved, I got a modest mortgage.  I pre paid it a bit with disposable income I didn’t need. Then I moved again, to the Bay Area.  I have a rather large (for me) Mortgage now which I’m happy with.  It is mentally a cost I’m willing to put up with and pay for years.  I do add an extra $19.37 to get to an even $2850 each month.  I could add more, I still have some disposable income, but I have other priorities at this time.  Maybe in 10 years or something (but not likely).

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3421 on: December 19, 2022, 07:00:58 AM »
At one point, I was more Pay off my Mortgage.  In fact, I had a paid off mortgage.  But then I decided I’d rather have a fat brokerage account, so when I moved, I got a modest mortgage.  I pre paid it a bit with disposable income I didn’t need. Then I moved again, to the Bay Area.  I have a rather large (for me) Mortgage now which I’m happy with.  It is mentally a cost I’m willing to put up with and pay for years.  I do add an extra $19.37 to get to an even $2850 each month.  I could add more, I still have some disposable income, but I have other priorities at this time.  Maybe in 10 years or something (but not likely).

The framing I’ve always found most useful is not “do you want a paid off home or not” but rather “would you rather have more of your money in your home, or in your investment account”

Discussions and projections about how much more you’d likely have seem to break down into “guaranteed” vs “average.” It seems more concrete to ask - do you want $200k in Vanguard (with whatever AA you choose) or $200k in equity?  Then comes the conversation of “well, it’s likely to be $325k in Vanguard vs $200k more in equity…”


OurTown

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Re: DONT Payoff your Mortgage Club
« Reply #3422 on: December 21, 2022, 08:01:25 AM »
I have always enjoyed this thread.  We are booking along with a balance somewhere in the 90k - 99k range at 2.5%; it is scheduled to pay off in early 2030.  I intend to be FIREd well before then, if the fates allow.  I have gone back and forth on this issue of whether I can FIRE with a mortgage, but I think I will be satisfied beefing up my after-tax brokerage account to where the brokerage balance is greater than the remaining mortgage balance, then letting it ride.

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Re: DONT Payoff your Mortgage Club
« Reply #3423 on: December 31, 2022, 01:02:29 AM »
I was just playing with the "pay x more a month and save y in interest and have z fewer payments" section of my mortgage account.  It's so tempting but I know it's the wrong thing to do!  I remembered this post had to come here for support.  Yup.  More equity isn't better than more in my investment portfolio.

Patting myself on my back today for not paying extra on our mortgage all year long.  Last year I paid a little extra.  It was that weird time between renting and buying when you have a month with no housing payment.  I made an entire extra payment.  Mistake, obviously.  (But there's a little part of me that loves that I'll make my last payment in June instead of August.  I know, it doesn't make sense!)

Okay.  $396K @ 2.75% until 2051. 

I can do this, I can not payoff my mortgage! (until 2051)

LD_TAndK

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Re: DONT Payoff your Mortgage Club
« Reply #3424 on: January 02, 2023, 12:43:33 PM »
Funny from our rival thread:

Quote
Do you ever lie awake at night thinking "I wish I owed JP Morgan money still and had tens more shares of VTSAX?"

Well no, but you might be kept up at night if you find yourself needing liquidity!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3425 on: January 03, 2023, 06:26:00 AM »
I saw that post, as well as the mortgage pay-ahead-ers chuckling.

grantmeaname

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Re: DONT Payoff your Mortgage Club
« Reply #3426 on: January 03, 2023, 07:29:57 AM »
Thanks for your heartfelt concern! I'm a real full adult who fully understands my own finances. I don't need liquidity with the funds I am using to prepay my mortgage.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3427 on: January 03, 2023, 07:30:45 AM »
Quote
Do you ever lie awake at night thinking "I wish I owed JP Morgan money still and had tens more shares of VTSAX?"

A (seemingly) long time ago someone recommended keeping track of the number of shares of VTSAX (which basically only goes up) I owned rather than the total balance (which fluctuates with the market) as a way of staying motivated. It's a mental strategy to be sure, but one I've found useful.

So... yes, I frequently wish I had a few dozen more shares of VTSAX in my brokerage account.  I really don't care about the mortgage payment as that's a low fixed cost which becomes less and less important each year via inflation and rising incomes.


talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3428 on: January 03, 2023, 08:41:02 AM »
when my parents were my age (early 40's), they were paying $780/monthly on a 3-br, 2bath house with perhaps 1,400 sq feet.

thirty years later, I'm paying $1,990/monthly for a much larger house with 2+ bet and bath compared to theirs, and I have a feeling that if I looked up the CPI today, my payments would be less in real terms. Of course, I also have to pay for much more expensive education and health care for my family.

Fomerly known as something

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Re: DONT Payoff your Mortgage Club
« Reply #3429 on: January 03, 2023, 08:59:06 AM »
Funny from our rival thread:

Quote
Do you ever lie awake at night thinking "I wish I owed JP Morgan money still and had tens more shares of VTSAX?"

Well no, but you might be kept up at night if you find yourself needing liquidity!

Why yes, which is why I took out a mortgage in 2017 instead of paying cash and why I have a Mortgage now when I could have paid cash for my place. 

On the other hand I am willing to prepay a bit on my mortgage at times from discretionary funds, but lately I’d rather spend more on travel instead.

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Re: DONT Payoff your Mortgage Club
« Reply #3430 on: January 03, 2023, 09:41:26 AM »
Thanks for your heartfelt concern! I'm a real full adult who fully understands my own finances. I don't need liquidity with the funds I am using to prepay my mortgage.
Hi @grantmeaname! On those mortgage payoff threads, no discussion is allowed, which is how this thread (aka The DPOYM Club) came to be. I saw your post and said nothing there, but suspected it would get a response in this safe pace. You may indeed fully understand your own finances, but there are other factors, such as inflation, and compound interest to consider.

You are welcome to do as you please, but this is a forum about reaching FIRE asap. Particularly in the US, paying yourself first and feeding the bank anemic, inflation eroded dollars, while letting your massive "Compound Interest" Army, which includes the mighty VTSAX division, protect you, is a far safer and more efficient route.

And we are all "real adults" here. We are happy to share this space to folks differing viewpoints. The more it's discussed, the more people learn. You may never change your mind, but if you did, you certainly wouldn't be the first. Feel free to drop by any time.

grantmeaname

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Re: DONT Payoff your Mortgage Club
« Reply #3431 on: January 03, 2023, 11:51:30 AM »
Yeah, I know that this has been contentious in the past and those other guys run a no-fun-allowed thread.

I have LONG been a DPOYM partisan and I'm sure one of us could find a post from 2012 where I argue to that effect.

Here's my logic. The earnings yield of the S&P500 is almost exactly 6%, and that's before tax because my marginal dollar would be saved into a taxable account. I have a new mortgage at late 2022 rates, not one of those incredible 2.3% unicorns that you lucky folk have. So I'm comparing a riskless 4.99% mortgage paydown to a risky 4.5-5% posttax S&P earnings yield and to a ~4% safe withdrawal rate. Under those circumstances, my circumstances, killing this mortgage fast is the overwhelming best choice.

I think I have spent many years paying myself first. Spending the last 30% of a 12-14 year career paying off the mortgage after a long time accumulating financial assets is almost exactly the path you describe. I've got a bigole pile of VTSAX (well, FZROX) and I should be able to just fill the tax advantaged space for two years and let it coast me to my Fire.

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Re: DONT Payoff your Mortgage Club
« Reply #3432 on: January 03, 2023, 12:19:55 PM »
@grantmeaname , thanks for your post. There are two markets you mention, and I'd love to know how you conclude both of those are the ones for your decision process:

  • The 5% growth in "yield"--I'm actually wondering if you didn't mean "earnings" for SP500, and
  • The safe withdrawal rate of 4%

One other one I'd offer as an alternative is some consideration of your baseline savings rate.

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Re: DONT Payoff your Mortgage Club
« Reply #3433 on: January 03, 2023, 12:26:23 PM »
Yeah, I know that this has been contentious in the past and those other guys run a no-fun-allowed thread.

I have LONG been a DPOYM partisan and I'm sure one of us could find a post from 2012 where I argue to that effect.

Here's my logic. The earnings yield of the S&P500 is almost exactly 6%, and that's before tax because my marginal dollar would be saved into a taxable account. I have a new mortgage at late 2022 rates, not one of those incredible 2.3% unicorns that you lucky folk have. So I'm comparing a riskless 4.99% mortgage paydown to a risky 4.5-5% posttax S&P earnings yield and to a ~4% safe withdrawal rate. Under those circumstances, my circumstances, killing this mortgage fast is the overwhelming best choice.

I think I have spent many years paying myself first. Spending the last 30% of a 12-14 year career paying off the mortgage after a long time accumulating financial assets is almost exactly the path you describe. I've got a bigole pile of VTSAX (well, FZROX) and I should be able to just fill the tax advantaged space for two years and let it coast me to my Fire.

Sounds like you are in an awesome financial position, and I certainly can't fault your logic.  FWIW, I've often held the position that "once you've maxed out your tax-advantaged accounts and provided you aren't placing a very large (>30%) of your NW into your house, either investing or pre-paying is a good financial choice".

As you can see above, I personally have often wished owned more shares or had a larger brokerage account, but the size of my mortgage doesn't bother me because 1) I'm not over leveraged and 2) I have said large brokerage to cover "very bad things" - including job loss and continued payments on my mortgage.

 

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Re: DONT Payoff your Mortgage Club
« Reply #3434 on: January 03, 2023, 12:39:23 PM »
The 5% growth in "yield"--I'm actually wondering if you didn't mean "earnings" for SP500
I meant what I said... I'm wondering if you're confusing earnings yield and earnings growth? I didn't say anything about earnings growth or "growth in yield".
Earnings yield is the inverse of the forward P/E ratio, or if you like the 'E/P' ratio. As an accountant and also a believer of evidence, I believe that accounting earnings is the least bad approximation of the flow of economic value (out of the set of earnings, dividends, buybacks, free cash flow), so the earnings yield is sort of the appropriate hurdle to compare against other projects.

The P/E of the S&P today is 16.6 so the earnings yield of the S&P 500 today is 6% pretax, which is 4.5-5% after tax if you're talking about taxable money at a 15-25% marginal income tax rate.

Quote
The safe withdrawal rate of 4%
That's just a rule of thumb in this context, although for me I think it will be pretty close to appropriate in the end. To my thinking the 4% safe withdrawal rate is also kind of like a hurdle rate or opportunity cost.

It matters here because if I could add 24 dollars to my stache but increase my expenses by a dollar a year, it would be a net negative, but if I could add 26 dollars to my stache for a dollar cost per year it would be net negative positive. A 2.5% mortgage rate, being lower than 4%, can help you because you can add $100k of VTSAX to the pile for $2500 more annual interest (ties up just $62,500 of your stache), while a 7.5% interest rate, being higher than 4%, can hurt you ($100k of VTSAX and foregone mortgage paydown requires $7500 more annual interest and ties up $187.5k of math under the 4% rule).

Quote
One other one I'd offer as an alternative is some consideration of your baseline savings rate.
Not sure what this has to do with anything? Can you expand what you mean here?
« Last Edit: January 03, 2023, 01:07:39 PM by grantmeaname »

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Re: DONT Payoff your Mortgage Club
« Reply #3435 on: January 03, 2023, 09:42:58 PM »
The 4% rule is designed to survive inflation while your E/P ratio is in today's dollars

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Re: DONT Payoff your Mortgage Club
« Reply #3436 on: January 03, 2023, 10:09:43 PM »
Yeah, I recognize you from around these parts @grantmeaname ;-) Frankly, I welcome any discussion on this thread that keeps it alive.

I want to remind anyone following along that my primary home has never had a mortgage, and our three rentals do. If you've peeked into my Condo Conversion diary,  you'll know we paid cash for a small condo in April 2022, intending to renovate, then slap a mortgage on it... nine months later, it's finally almost done and everyone knows what's happened to mortgage rates since then. (They're still far below what i was thrilled to get in 1996, but I've gotten spoiled.)

Here's what I can't figure out, GMaN. You have stated your NW to be roughly equivalent to the value of your new home. From my 10 years FIRE vantage point, that ain't exactly a huge nest egg. I think I'd be shooting for a second comma betore accelerated mortgage payoff. You know what feels better than a paid-off-early mortgage? A million bucks in liquid investments first.

Why all of a sudden do you want to pay off the mortgage, when the whole damn stock market is on sale? The only regret I have about the cash condo is that I can't shovel huge piles of VTSAX (or equivalent) into my portfolio at the moment. But, wait! I guess I don't really need to, because I did that first.

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Re: DONT Payoff your Mortgage Club
« Reply #3437 on: January 04, 2023, 06:20:36 AM »
I'd like to throw out one more reference figure (for mortgage rate comparison purposes): the long-term 10% average total nominal return of the SP500.

I recognize that some premium on safety should exist, so a risk-free return shouldn't have to be 10% to compete for my marginal dollar.


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Re: DONT Payoff your Mortgage Club
« Reply #3438 on: January 04, 2023, 06:41:46 AM »
Historically only one-in-ten 30-year periods have had a nominal annual return of less than 6.4% (S&P 500). So there's something like only a 5% chance for paying down a 4.99% mortgage to be better than investing. And don't forget that your mortgage interest might be tax-deductible and there's always a chance you could refinance the debt to a lower interest rate in the future.

By the way, the stickied investment order post suggests that it is better to invest in taxable accounts than it is to pay off debt at a ~6.6% (or lower) interest rate. ~8.6% if comparing to tax-advantaged accounts. Based on the current treasury yield.

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Re: DONT Payoff your Mortgage Club
« Reply #3439 on: January 04, 2023, 06:58:33 AM »
Historically only one-in-ten 30-year periods have had a nominal annual return of less than 6.4% (S&P 500). So there's something like only a 5% chance for paying down a 4.99% mortgage to be better than investing. And don't forget that your mortgage interest might be tax-deductible and there's always a chance you could refinance the debt to a lower interest rate in the future.

Perhaps its because most of my professional life has focused on probabilities, but I have always struggled to understand why some people favor a 'guaranteed return' over the far, far more likely outcome.  Behavioral studies suggest we feel financial loss 3x greater than a similar sized gain - even accounting for this it's hard for me to comprehend why some will favor a path that is less optimal 19/20 and only marginally better the 20th time.

It's not that different* from being on a gameshow where you had the opportunity to roll a set of dice and get paid 100x that amount (e.g. rolling a 7 = $700) - or just take $300 without rolling. Why would you choose the $300? The worst-case scenario is pretty decent, and the likely outcome is much, much better.


*not a perfect match statistically, but I'm still drinking my morning coffee.

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Re: DONT Payoff your Mortgage Club
« Reply #3440 on: January 04, 2023, 06:59:34 AM »
The 4% rule is designed to survive inflation while your E/P ratio is in today's dollars
I wasn't comparing the 4% rule to today's earnings yield. They're both worse than my mortgage rate and both suggest paying down the mortgage.



Why all of a sudden do you want to pay off the mortgage
All of a sudden I have a mortgage - I wasn't carrying a mortgage all this time and then woke up in November and decided to kill it. I've always been a renter in HCOL or VHCOL areas until lately.

Quote
the whole damn stock market is on sale
I disagree. The market has pulled back from objectively very expensive to its long term typical valuation - the market costs about what it should, and is not a screaming deal. If anything, it's a bit overpriced as we're staring down a recession, but I'm not a market timer and don't let my feelings make that decision for me. What I am doing is letting the earnings yield of the market tell me what my hurdle rate for other projects is (mortgage paydown and energy efficiency work)

From the excellent JPM Guide to Markets (slide 5)




I'd like to throw out one more reference figure (for mortgage rate comparison purposes): the long-term 10% average total nominal return of the SP500.

I recognize that some premium on safety should exist, so a risk-free return shouldn't have to be 10% to compete for my marginal dollar.
I don't think that's a bad one in general, but it's unconditional and the earnings yield is conditional. The expected return on stocks is lower when P/E is higher. There's two reasons for this - first, you're buying less earnings and actual economic value of businesses per dollar when the valuations are expensive, and second, unless P/Es are permanently higher from now on, valuations are mean reverting over some time period so you have a rubber band effect.

JPM GtM again, slide 6:




your mortgage interest might be tax-deductible
I'm MFJ, and the mortgage interest (4.99%*372k) is $18.5k or not even 2/3s of enough to get me to the starting line vs the standard deduction. Even if I had $10-15k of other itemized deductions, which I don't, it would only be a tiny bit of the borrowing that effectively benefits.

Quote
there's always a chance you could refinance the debt to a lower interest rate in the future.
I don't forego this option. I can still do that if someone offers me a 2011-style 2.2% mortgage after the house is paid off.

Quote
By the way, the stickied investment order post suggests that it is better to invest in taxable accounts than it is to pay off debt at a ~6.6% (or lower) interest rate. ~8.6% if comparing to tax-advantaged accounts. Based on the current treasury yield.
I'm not a fan of rules of thumb as substitutes for actual thinking, and this one makes very little sense to me. But regardless, I am all the way at the bottom of the list - no other debt paydown, and completely filling all my tax-advantaged space every year.
« Last Edit: January 04, 2023, 07:14:16 AM by grantmeaname »

grantmeaname

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Re: DONT Payoff your Mortgage Club
« Reply #3441 on: January 04, 2023, 07:07:33 AM »
Historically only one-in-ten 30-year periods have had a nominal annual return of less than 6.4% (S&P 500). So there's something like only a 5% chance for paying down a 4.99% mortgage to be better than investing. And don't forget that your mortgage interest might be tax-deductible and there's always a chance you could refinance the debt to a lower interest rate in the future.
Perhaps its because most of my professional life has focused on probabilities, but I have always struggled to understand why some people favor a 'guaranteed return' over the far, far more likely outcome.  Behavioral studies suggest we feel financial loss 3x greater than a similar sized gain - even accounting for this it's hard for me to comprehend why some will favor a path that is less optimal 19/20 and only marginally better the 20th time.

It's not that different* from being on a gameshow where you had the opportunity to roll a set of dice and get paid 100x that amount (e.g. rolling a 7 = $700) - or just take $300 without rolling. Why would you choose the $300? The worst-case scenario is pretty decent, and the likely outcome is much, much better.
This is an unfair straw man and your example does not capture the facts of my situation. My mortgage paydown return is equal to or better than the market return despite the market return's uncertainty.

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Re: DONT Payoff your Mortgage Club
« Reply #3442 on: January 04, 2023, 07:22:46 AM »
This is an unfair straw man and your example does not capture the facts of my situation. My mortgage paydown return is equal to or better than the market return despite the market return's uncertainty.
I've always been a renter in HCOL or VHCOL areas until lately.
4.99% 15-year mortgage (locked in September, closed in November)

It's great that your mortgage paydown return has been better than the market, but you've only had a mortgage for a month or two. On that time frame, investing in the market is only slightly better than casino gambling. I would be leery to draw any long term conclusions.

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Re: DONT Payoff your Mortgage Club
« Reply #3443 on: January 04, 2023, 07:24:27 AM »
Historically only one-in-ten 30-year periods have had a nominal annual return of less than 6.4% (S&P 500). So there's something like only a 5% chance for paying down a 4.99% mortgage to be better than investing. And don't forget that your mortgage interest might be tax-deductible and there's always a chance you could refinance the debt to a lower interest rate in the future.
Perhaps its because most of my professional life has focused on probabilities, but I have always struggled to understand why some people favor a 'guaranteed return' over the far, far more likely outcome.  Behavioral studies suggest we feel financial loss 3x greater than a similar sized gain - even accounting for this it's hard for me to comprehend why some will favor a path that is less optimal 19/20 and only marginally better the 20th time.

It's not that different* from being on a gameshow where you had the opportunity to roll a set of dice and get paid 100x that amount (e.g. rolling a 7 = $700) - or just take $300 without rolling. Why would you choose the $300? The worst-case scenario is pretty decent, and the likely outcome is much, much better.
This is an unfair straw man and your example does not capture the facts of my situation. My mortgage paydown return is equal to or better than the market return despite the market return's uncertainty.

I wasn't referring to your situation per se and I don't consider it a straw man argument at all.
I was speaking in general about the tendency for individuals to choose the option which was far less likely to yield the best outcome (10-20x less likely over decadal timeframes) - particularly when the option they are selecting is only slightly better than than the 'bad' outcomes they are trying to avoid.
See upthread about discussion of your situation and my general support of your approach (however, as indicated the return of the SP500 is far greater than 6% when you do not adjust for inflation, which you shouldn't do for comparison to a fixed-rate debt).

grantmeaname

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Re: DONT Payoff your Mortgage Club
« Reply #3444 on: January 04, 2023, 07:28:39 AM »
Got it. Sorry.

I guess the other point is that people on this forum should be optimizing for the greatest chance of success in early retirement and not the greatest final wealth after 30 years. The no mortgage path mitigates sequence of returns risk and so has better 5th and 10th percentile SWR rates than the mortgage+more stock path, even thought it has a lower average final wealth after 30-50 years. If your goal is to retire early as safely as possible, and not just to be as rich as possible at 80, it better fits that goal.

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Re: DONT Payoff your Mortgage Club
« Reply #3445 on: January 04, 2023, 07:34:10 AM »
It's great that your mortgage paydown return has been better than the market, but you've only had a mortgage for a month or two. On that time frame, investing in the market is only slightly better than casino gambling. I would be leery to draw any long term conclusions.
That's not what I said at all. Did you read my post?

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Re: DONT Payoff your Mortgage Club
« Reply #3446 on: January 04, 2023, 07:40:49 AM »
Got it. Sorry.

I guess the other point is that people on this forum should be optimizing for the greatest chance of success in early retirement and not the greatest final wealth after 30 years. The no mortgage path mitigates sequence of returns risk and so has better 5th and 10th percentile SWR rates than the mortgage+more stock path

Sounds like we are in broad agreement.
My main takeaway from literally years of discussion and analysis is that it's particularly risky to POYM if it means foregoing tax-advantaged accounts, when it results in a very large (~>30%) of your NW being tied to your home, and when the rate on a fixed mortgage is very low (≤ 4%). There are times when paying off your mortgage is essentially no different (e.g. very large savings) and a few when in which it can be beneficial (e.g. when guarding against SORR is your primary goal, or to keep spending below certain thresholds for subsidies).

Often the discussions aren't that nuanced, or include [misleading/non-universal] mantras like "____ will make you sleep better at night" or "no one can take your home from you".

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Re: DONT Payoff your Mortgage Club
« Reply #3447 on: January 04, 2023, 07:45:15 AM »
your mortgage interest might be tax-deductible
I'm MFJ, and the mortgage interest (4.99%*372k) is $18.5k or not even 2/3s of enough to get me to the starting line vs the standard deduction. Even if I had $10-15k of other itemized deductions, which I don't, it would only be a tiny bit of the borrowing that effectively benefits.

Do you not have $10k in SALT? My property taxes alone get me the $10k, and many also have some significant sales and income taxes. I agree with you point that the 'benefit' is minimal, but I'm gonna take the extra deduction while I can.

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Re: DONT Payoff your Mortgage Club
« Reply #3448 on: January 04, 2023, 09:50:58 AM »
Nope, more like $5k. Maybe enough to push me into itemizing so a tiny fraction of the mortgage interest is deductible, but not a lot.

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Re: DONT Payoff your Mortgage Club
« Reply #3449 on: January 04, 2023, 10:00:06 AM »
Often the discussions aren't that nuanced, or include [misleading/non-universal] mantras like "____ will make you sleep better at night" or "no one can take your home from you".
We are 100% in agreement there.