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pay off mortgage in light of crisis?
Old 10-12-2008, 11:57 AM   #1
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pay off mortgage in light of crisis?

Hate to rehash this theme again, but given the credit crisis I've been trying to find a SAFE PLACE to put my money. The only thing I can think of is to pay off my fixed 5.75% mortgage.

I have enough funds in Vanguard's Treasury MM fund to do so. I'm worried about everything defaulting (see John Mauldin's letter this week) and about losing my cash.

Or is this just panic, and I should sit tight?

winnie
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Old 10-12-2008, 12:03 PM   #2
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good question. i've been wondering the same thing about a small mortgage i never bothered to pay off. looking forward to seeing responses.
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Old 10-12-2008, 12:09 PM   #3
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If you are concerned about losing value, then move the money to an FDIC insured account.

If you have ample emergency funds then I would use some to pay down the mortgage. 5.75% is pretty good (less whatever the tax break is worth to your tax return)
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Old 10-12-2008, 12:09 PM   #4
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A 5.75% guaranteed return isn't looking too bad right now.
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Old 10-12-2008, 12:20 PM   #5
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A 5.75% guaranteed return isn't looking too bad right now.
I think there is another way to look at this. Now may or may not be a good time to invest in equities; but it has to be better from a buy and hold perspective than most anytime in the past 5 years.

We can never know the future of companies we invest in. What we can know is the price we are paying.

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Old 10-12-2008, 12:20 PM   #6
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Paid off my mortgage after 7 years last July mostly for the psychological relief of tell the world to stick it if I wanted to. Was in the fortunate position to do so while still saving reasonably substantial sums {hmmmm, maybe not so substantial anymore }. Took out chunks of $$ on stock market rallies but a majority of this was simply paying an extra $500 to $1,000 per month.

In my situation with my psychological makeup, this was a great relief and even moreso for DW who is FAR more conservative than I.

Caveat: The market tanking still hurts and makes me feel eeewwwwggy so don't expect that to go away.
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Old 10-12-2008, 12:22 PM   #7
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I just finished reading Mauldin's letter. Chilling! Let's hope it all doesn't come to pass.

With three mortgages at the moment, I have also been pondering this payoff option. So far I haven't done it. At 8%, 7.875% and 6.5% the return before taxes is attractive, after taxes not as much though. If I paid them all off, my after-tax cash reserve would not look so good. But my new-found cash flow income would be great. What are the relative risks? Returns? If I knew this market was going to languish around the bottom for a decade, and the financial system was going to completely tank, I'd pay them all off and invest the excess cash flow by DCA. But who knows?
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Old 10-12-2008, 12:29 PM   #8
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[quote=Alan;730893]If you are concerned about losing value, then move the money to an FDIC insured account.
quote]

Yes, but I don't know what the heck "FDIC Insured" means, really. BEFORE they bumped the limit to $250k, there wasn't enough money to pay out should really large Bank defaults happen. How, then, can they make good on a $250k guarantee?

winnie
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Old 10-12-2008, 12:29 PM   #9
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Originally Posted by winnie View Post
Hate to rehash this theme again, but given the credit crisis I've been trying to find a SAFE PLACE to put my money. The only thing I can think of is to pay off my fixed 5.75% mortgage.

I have enough funds in Vanguard's Treasury MM fund to do so. I'm worried about everything defaulting (see John Mauldin's letter this week) and about losing my cash.

Or is this just panic, and I should sit tight?

winnie
If it's panic, then you have a lot of company in feeling that way.

Vanguard's Treasury MM fund is safe, in my opinion. First, it's invested in treasuries which are fully backed by the federal government. Second, Vanguard has decided to participate in the MM insurance program set up on September 19th as part of the bail-out, so you essentially doubly insured. Your main risk is that of losing money to inflation if you leave it there for many years.

Then again, how much safer can you get than eliminating a mortgage? It's not like your mortgage company can change their minds once they have given you a release of lien. Your house could be worth less in a few years than it is now, but then that would happen whether or not you paid of your mortgage.

So, I think either of these options are pretty safe for right now. Personally, I love having my mortgage paid off, and having no monthly mortgage payment gives me extra money each month that I can invest as I wish.
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Old 10-12-2008, 12:49 PM   #10
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[quote=winnie;730909]
Quote:
Originally Posted by Alan View Post
If you are concerned about losing value, then move the money to an FDIC insured account.
quote]

Yes, but I don't know what the heck "FDIC Insured" means, really. BEFORE they bumped the limit to $250k, there wasn't enough money to pay out should really large Bank defaults happen. How, then, can they make good on a $250k guarantee?

winnie
If you are nervous that the government will fail to deliver on their Federal insurance scheme, then pay off your mortgage. Really. Piece of mind.

I would still risk having emergency funds in an FDIC insured account.
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Old 10-12-2008, 12:56 PM   #11
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Originally Posted by winnie View Post
Hate to rehash this theme again, but given the credit crisis I've been trying to find a SAFE PLACE to put my money. The only thing I can think of is to pay off my fixed 5.75% mortgage.

I have enough funds in Vanguard's Treasury MM fund to do so. I'm worried about everything defaulting (see John Mauldin's letter this week) and about losing my cash.

Or is this just panic, and I should sit tight?

winnie
I think this is a very very BAD idea. You need to have a maximum emergency fund in cash during a recession. Housing prices are in a severe downturn. How would you feel in three years if you had paid off your mortgage and your house was worth much less? In other words, you had thrown away that money?

If you keep cash, you maintain your ability to ride out this downturn.

Also, I read the Maudlin letter, which is quite detailed, but it doesn't include any information that is new about the banks or the FDIC's ability to guarantee money markets. This letter doesn't say anything that I haven't read from other sources.
http://www.2000wave.com/article.asp?id=mwo101008

In answer to your question about how can the FDIC pay off claims? The same way the Treasury is raising bailout money, borrowing and printing money. Yes, that will cause inflation. But what are you going to do about it?

Another thing to keep in mind is that if inflation does heat up in the future, a 5.75% mortgage may look like a bargain.
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Old 10-12-2008, 01:33 PM   #12
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Thanks for the responses, all.

Ok, I think now I get why NOT to pay off the mortgage .

The worst case scenario is if big banks default and the FDIC have huge claims to pay off. Money will be still safe because, as Oldbabe points out, the claims will be made good by "running the printing presses." Inflation soars. IN an inflationary environment, of course it's better not to pay off the mortgage.

If the "financial abyss" is skirted and government intervention is successful over the next week(s), then having the cash to invest amongst the wreckage will be a good thing. (right?)

thanks all, for helping me think through this.
Winnie
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Old 10-12-2008, 01:55 PM   #13
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I paid of the primary residence a few years ago. I am holding a $175K mortgage on the weekend place and always planned to pay it off when DW retires (probably next year). Now I am thinking I would rather keep that cash in the current expenses bucket so I can give the equities more time to rebound. In any event, I don't plan to carry the mortgage long term. I will pay it off within 5 years or so.
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Old 10-12-2008, 02:21 PM   #14
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I just read Maudlin's missive. Several weeks ago I read that letters of credit had frozen, cargo ships can't sail until these documents are executed.

Christmas goods were probably shipped a month ago but, if not, the buyers may still be on the contractual hook for goods that arrive too late for the prime retail season. Crops are in the harvest cycle, grains will be ready to ship in a matter of weeks. Could get ugly!!
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Old 10-12-2008, 02:54 PM   #15
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in a depression cash is king. better to hoard it up now than give it to a bank. you can always default on your loans if you need the cash to feed yourself and your family. bank won't give you the cash back if things get tight
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Old 10-12-2008, 02:59 PM   #16
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I have several CD's that are going to mature through out 2009 (about $45K worth) and a substantial and unavoidable Income Tax Refund (of about $10.5K) coming on my current years taxes. I also have a $80K HELOC (current rate, interest only, of, 4.5% and dropping to 4 or 3.5% dependent on Mr. B's actions). My plans are IF interest rates on CD's (any term) are below the HELOC rate to CONSIDER paying down the HELOC balance, if not CONSIDER the purchase new CD's. Of course another alternative would be to just spend the cash on some big VACATION (like for 3 or 4 months of US Western and South Travel).
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Old 10-12-2008, 11:59 PM   #17
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I just read Maudlin's missive. Several weeks ago I read that letters of credit had frozen, cargo ships can't sail until these documents are executed.

Christmas goods were probably shipped a month ago but, if not, the buyers may still be on the contractual hook for goods that arrive too late for the prime retail season. Crops are in the harvest cycle, grains will be ready to ship in a matter of weeks. Could get ugly!!
That "letters of credit" bit is a scary scenario:

Credit Crisis Collapse What Happens Next? :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website
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Old 10-13-2008, 08:07 AM   #18
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The answer to OP's questions is of course it depends.

I'd be more inclined to pay it off if the mortgage is a relatively small one on a property than if you have a lot of equity. The value of being able to "mail back the keys" in the event of continued economic meltdown is far less for if you have a $100K mortgage on house you bought 10 years ago that you think is worth $250K than a a $400K mortgage on a house you bought 2-3 years ago for $500K which may only be worth 400K.

I think having a 6 month cash emergency fund is more important now than anytime in the last couple of decades, so I wouldn't deplete my 'Vanguard MM to pay off the house.

On the other hand 5.75% isn't that low a mortgage and it beats the heck out of any risk free investment out there. There is no law that says you have to pay it all of so using 1/2 of the money market to pay it down maybe a reasonable compromise.
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Old 10-13-2008, 08:21 AM   #19
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We've got a very small mortgage left and decided to pay it off in a week or two. I think we'll feel a little bit more psychologically relieved investing more after having all debts paid off. But in our case it's purely emotional for sure
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Old 10-13-2008, 08:34 AM   #20
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I think having a 6 month cash emergency fund is more important now than anytime in the last couple of decades, so I wouldn't deplete my 'Vanguard MM to pay off the house.
I agree about the cash cushion. In the last few years we have made conscious efforts to downsize our lifestyle and our house in an attempt to armageddon-proof our financial position as much as reasonably possible.

When we moved, mortgage calculators were telling us we could "afford" $500,000 homes. We instead paid cash on an $85,000 home and left enough in the bank to cover more than a year's worth of belt-tightened living expenses. And as much as recent market declines have me flummoxed about my retirement, at least *at present* the decisions we made in the last 2-3 years have taken a LOT of stress off of the day to day living.
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